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IR35: Advisers call for government consistency

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19th Jun 2013
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Governmental departments are inconsistent in deciding the tax arrangements of their workers, according to IR35 experts. 

The issue cropped in the recently published minutes of the HMRC IR35 forum in April, continuing the 14-year conflict that has arisen between the tax authorities and freelance workers.

Last year the debate hit the headlines when senior civil servants and other high-ranking public sector workers were found to be using personal services companies to avoid paying national insurance contributions (NICs) and to reduce their tax liabilities. In the wake of the controversy and a subsequent policy flip-flop on "controlling persons" rules, government departments have been reviewing the tax arrangements of their contract workers.

Kate Cottrell, an IR35 Forum member, said that "whole departments have a default position that contractors are caught by IR35" and are terminating contracts if the contractor is not paying NICs.

Other departments appear to have a different policy on payroll. "There won't be any consistency on [tax arrangements for civil servants] because it is down to each department how to handle it," Cottrell said.

Undeterred by continuing criticisms from advisers about the inconsistencies, HMRC told the forum that it had created a fourth specialist team to pursue its own enquiries. 

Seb Maley from Qdos saw this as an affirmation of the Revenue's commitment to IR35. "One would assume that this addition will significantly increase their capacity to mount new enquiries, something that will be of concern to limited company workers," he said. 

Maley added that there was also some concern about HMRC’s intention to allow non-specialist offices to handle IR35 issues. 

"Since the introduction of the specialist teams, enquiries have progressed with more speed and efficiency; moving some IR35 investigations away from specialists could mean we’ll go back a step and will see a return to very long, protracted status arguments," he said. 

"A particularly interesting revelation was the stats from HMRC’s own contract review service. HMRC have always offered contractors a ‘free review’ service to get an opinion on their IR35 status. We have always advised people to avoid using this service, as there is always a chance that HMRC may decide that you are ‘inside’ IR35 and mount a full enquiry.

"As it turns out, HMRC reviewed just 94 contracts in tax year ended April 2013. Responses were given in 89 of these cases (what happened to the other six is unknown), but in HMRC were ‘unable to provide an opinion’ in 79 of them. I think likelihood in many of these cases is that HMRC insisted that they speak to the contractor’s end client, which immediately rang alarm bells," he added. 

The Finance Bill 2013 includes clauses that will require "office holders" to be taxed at source under IR35, but the legal definition of office holder is still being debated. In the run-up to Royal Assent HMRC published some interim guidance on how IR35 applies to officer holders.

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Dave Chaplin
By Dave Chaplin
24th Jun 2013 13:26

Inconsistent application isn't necessarily a negative

Whilst it is reported that different Government departments are applying the rules differently, this is similar to the private sector and isn't something that is necessarily that surprising.

For example, some firms who are savvy on employment law will insist that all workers are given service based contracts and that they must be treated as external suppliers (so, clearly outside IR35). This strategy might be to mitigate any future Employment claims, and also because they might actually want the security of having a service provided, irrespective of who provides it.

Others will hire contractors and want personal service - they will want to move them from one project to another, telling them how and and what to work on and blend in and act the same as their own employees with no different treatement (so, clearly inside IR35).

So the fact that different departments decide to act differently isn't a big deal. The problem is a little more subtle than that.... It's where departments actually want to hire people on service based contracts but insist they pay tax as though they are employees. That is clearly bonkers and contractors who are in high demand and have work offers elsewhere are either unlikely to work for Government, or will increase their fees accordingly, costing Government and tax payers more money.

Dave Chaplin

CEO, ContractorCalculator

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By cfield
25th Jun 2013 16:43

A couple of anecdotal cases

A couple of my contractor clients who work for the public sector had to jump through these hoops.

One works for local councils as a consultant and he got his main contract reviewed by HMRC right at the start. They gave him a clean bill of health despite some features indicative of employment (indeed he used to be an employee of one of the councils but took redundancy) so he got a result.

The second works for the NHS and his manager just asked for a letter from his accountant confirming that he was paying tax. No mention of paying tax on his fees as employment income. I just did him a letter stating that he was paying VAT, corporation tax and PAYE above the relevant thresholds.

I got the impression that his management just wanted to get it out of the way with as little fuss as possible. They clearly know it is just the latest political stunt to pacify the media, and want to get on with the main priority of managing their service properly without interference from a load of politicians and civil servants who know next to nothing about how a business actually works.

Government departments are probably being leant on much more than other public sector bodies, so they don't have the luxury of giving them short shrift. They tend to have more box-ticking [***]-covering types on their staff too, so little surprise they are being so heavy handed.

Silly really - all they've got to do is make sure the guys at the top like Ed Lester don't work through service companies. How hard can that be?

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