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IR35 - what is it good for? By Simon Sweetman

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1st Jun 2009
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Simon Sweetman reacts to the news last week that the PCG now has information about the tax take from IR36. He adds his call to the growing voice of doubt over the usefulness of this legislation.

I think we all have to be grateful to the Professional Contractors’ Group for having used the Freedom of Information Act to wrench information about the workings of IR35 from HMRC. The information confirms what we have all suspected, that as a direct revenue raiser this legislation was and is a disaster. In six years from 2002/3 to 2007/8 it has raised £9.2 million.

Quite what it has provided by way of professional fees must be another matter altogether. Apart from the regular advice given to regular clients, there are firms out there that have built their entire fortunes on IR35. Perhaps it is ungrateful for the profession to complain!

It is possible to argue that the legislation will have sucked in large quantities of tax and NIC through its deterrent effect - possible to argue but impossible to prove or refute, let alone measure. My experience (for what it’s worth) is that many people have found that sticking their heads in the sand has been a workable strategy, since HMRC has found it difficult to police the vast new numbers of personal service companies in any substantial way. That has to be an indicator of poor legislation, because legislation that can only be enforced in a small fraction of cases is no good for anyone.

We appear to have a situation in which HMRC, even when it gets involved, hardly ever wins its arguments. The PCG says that it knows of 1,468 enquiries by HMRC (those presumably being the ones handled by their associates) and that of those only six have succeeded in raising more tax. I have also found that the larger clients (the big companies that use the services of the consultants) manage to be highly reluctant to cooperate with HMRC in establishing the facts. There have also been a fair number of cases going to tribunal or even on to the courts, producing far more heat than light as different indicia of employment became briefly fashionable.

The overall cost of this legislation must have been enormous, even before we add in its effect in souring relations between HMRC and the profession. If we cast our minds back it was originally a response to the substantial incorporation of one person consultancies, a trend that arose from the demands of the big company clients and the agencies but was then also used to gain a tax advantage.

It was one of the first Inland Revenue consultations I was involved in, and not one of the best. The legislation was already written before consultation started and the only changes were to the advantage of big business. I hope we have all learned something since then.

In the end I think we can echo Sly Stone when it comes to IR35: ‘What is it good for? Absolutely nothin’, say it again’ !

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
03rd Jun 2009 13:47

Possibly the VAT drives this
Until April this year, no VAT was charged on the "wages" element of the charges under the concession. This keeps the VAT down and deems the carer to be an employee of the disabled individual - hence the exclusion from VAT.

I wonder if now that the concession has been abolished whether the practice will change.

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By AnonymousUser
03rd Jun 2009 12:11

what is it good for
First of all grovelling apologies about the misattribution of the Edwin Starr song (in fact originally recorded by the Temptations though I think their version was released later). You know what they say, if you can remember the 1960s......

People's comments make it clear that HMRC can still hide behind the alleged deterrent effect of IR35. They also suggest that yes, there was and is a genuine problem with "disguised employment".

Not IR35 but a "disguised employment issue" on which feedback would be good is the position of agencies who supply carers to the disabled. Most of them appear to supply them as "self-employed" or suggest that they are employees for the disabled person, though this appears to be wrong in law. What is the experience here ?

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By Anonymous
03rd Jun 2009 10:54

Spot on Neil Wilson
Put the onus onto the client / agency - that where a named individual is hired to work as part of a team that looks smells and tastes like employment - then the client or agency must operate PAYE on that individual.

And before PCG and others get hot under the collar - the outcome of this will be for client / agency to look much more closely at what they are doing, and become clearer in their contracts. This should lead to some contractors being genuinely in business on their own account, and many others having full employment rights. It would level the playing field.

Unless others know otherwise.

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By jefkal
02nd Jun 2009 18:05

Props
It wasn't Sly Stone or his band, the Family Stone, who used the lyrical phrase "What is it good for?". It was Edwin Starr, in the song "War". As the author of an authorized biography, I Want to Take You Higher: The Life and Times of Sly & the Family Stone (Backbeat Books, 2008), I felt obligated to point this out.

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By BelGrant
02nd Jun 2009 15:12

Third Way Approaches
The issues that I've identified with 'third way' tax alternatives for owner managed contractors are these:

(1) They would penalise those that have taken the trouble to understand IR35 since it was introduced: by getting expert advice, getting their contracts reviewed and are able to work autonomously in an engagement according to the IR56 guidelines under 'self employment'.

(2) They're a retrograde step for contractors because they reinforce the idea that owner managed contractors aren't really in business because they don't employ other staff (or just a spouse). Even if they currently work outside IR35 and are very much 'in business on their own account' just like any other business.

(3) Alternatives just appease those that have taken insufficient steps to abide by the IR35 rules, since they were introduced, by not getting their contracts reviewed and not working to self employed working practices.

(4) They could encourage a contractor brain drain. Many would abandon their current specialisms and start other types of businesses instead. Others would take up permanent employment. A business identity is important to many contractors. In some cases, more important than the tax savings, resulting from IR35 compliance. Those that don't see themselves in business are less likely to be IR35 compliant anyway, and a third-way alternative would not benefit them appreciably. But it would disadvantage those that do see themselves in business.

Bel Grant
Writer on Flexible Working and Recruitment
http://twitter.com/BelGrant

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By ChickPea
02nd Jun 2009 14:27

1-year rule
James Smith's proposed 1-year rule doesn't help, and I for one would fight tooth-and-nail against it. I don't *want* to be an employee of my clients, or to have employment rights. I've set up my own company, with another director, for the long haul. I really don't want to be dipping in and out of different pension schemes every couple of years, worrying about office politics, caring about who gets promoted or this year's car scheme.

And what counts as "full-time"? I have one client at the moment that takes up several hours a day, four days a week- but then I go home and do work for other clients. This engagement could go on for months or even years, but at the moment it has a horizon in weeks.

We have about 50 clients, some bigger than others- am I an employee of all of them? I don't think so. Some are longstanding clients, some are one-offs, and some are on-again/off-again as the need applies.

Finding a way out for the government from stupid legislation is not what we should be doing here- the essential problem is that it's a category error: freelancers are *not* "disguised employees"- we are taken on to fill in resourcing gaps, or to get the temporary use of a skillset that a company doesn't have in-house (whether due to happenstance or policy).

Most companies don't have in-house painters: if they need a building painting, they engage a firm of painters. Even if painting the building takes a year, the painter would not become employees of the client. I can't see the distinction- except that the government don't understand what we do, witness Red Dawn's characterisation of us as "overpaid typists".

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By peterfox
01st Jun 2009 17:51

Genuine freelancers are not employees of end clients or agencies
Maybe I'm missing the point but genuine freelancers are not employees of end clients or agencies. How exactly does this resolve the problem? As far as I can see it just presents it in a different way.

Until the criteria are clarified in a clear unambiguous way for for service and of service I don't see that any tinkering with the tax system will resolve this issue.


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By NeilW
01st Jun 2009 16:54

There is a very simple solution
You require that any employment agency/business employs directly under a contract of service anybody who they hire out to hirers.

And then remove IR35 from the tax lexicon and put the same determination rules into the Employment Rights legislation. Once the risk is back where it belongs - with the employer then the contracts will be sorted out accordingly.

The tax consequences follow naturally and the status of low level temporary workers is sorted at a stroke.

NeilW


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By MikeBellisimo
01st Jun 2009 16:17

Washes Whiter?
If IR35, MSC et al. are acting as deterrents then that suggests people might be paying too much tax rather than the "right amount of tax". Is that fair or even sensible?

MPs; especially Labour ones do seem quite keen on paying as little tax as possible whilst encouranging others to pay as much tax as possible. That seems a little unreasonable.

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By Anonymous
01st Jun 2009 16:09

Tax deterrence?
For nearly 60 years the only criminal sanction in any provison of the Taxes Acts [ICTA s 765 'Subject to ..all transactions shall be unlawful....'] has been on the statute book, only to be repealed by the Corporation Tax Act 2009.

There has never been a prosecution under these provisions, but it would be nonsense to think that for that reason they were ineffective-even though many accidentally failed to follow its requirements

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By mikewhit
01st Jun 2009 14:28

MSC another own goal ?
Simon,
How much net revenue was raised by the introduction of the MSC rules ?

As opposed to all the people originally happily paying the correct taxes and having their paperwork kept in good order working through, e.g. JSA, who then had to jump ship and become one-person Ltd Co.s and attempting to fend for themselves.

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By Anonymous
01st Jun 2009 14:00

IR35 does work some of the time
I personally know one person that have decided to remain an employees being paid var PAYE rather the setting up a LTD to contract back to their forma employer. (A lot of people in IT have decided that with IR35 contracting does not pay enough to be worth the risk, so remained PAYE)

I also know a few contractors (mostly not IT – health service accountants) that have decided to pay themselves enough salary to avoid the need for a deemed payment etc, as they manage their clients staff so are clearly “part and parcel”.

However most IT contractors just ignore IR35 as they know they are very likely to win in the unlikely event that HMRC brings a case.

So IR35 have increased (or protected) that tax take, we will however never know by how match.

However sooner the real problem of the vastly different tax rates on earned and none-earned income is addressed the better. IR35 is just badly designed hack to avoid addressing the root problem (of NI) that none of the political parties will face up to.

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By Anonymous
01st Jun 2009 13:31

Pressure from spouse
Well, Cherie did push me into it. She isn't always right.

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By Anonymous
01st Jun 2009 13:30

Waste of time
It shows that this measure has been a waste of time and clearly shows that sometimes the best policy is to do nothing.

Yes there was a problem with people working 9:00am to 5:00pm who were clearly employees but then started working under the guise of limited companies.

But it was small and in an attempt to tackle this problem the government has complicated this issue, wasted many genuine contractors times with enquiries (and probably stressed them out as it was difficult to properly clarifiy if you were caught or not).

Those contractors that were genuinely at risk often had a good relationship with their bosses and used carefully worded contracts to avoid the problem.

It also worth baring in mind that given the state of the economy and the rising unemployment amongst skilled professionals, I suspect there will be a massive increase in contractors since companies are going to be reluctant in taking on permanent staff until there is evidence of a strong recovery (which could be years away).

Some of these people will work for 2/3/ months and then have nothing for 2 months before starting another contract. It will be a worringly time for them and they will need as much money as possible and therefore will no doubt be contracting through a limited company as opposed to becoming a temp employee on the agencies books.

On this basis, wouldn't it be simpler if IR35 was abolished to ensure that the labour market stays as flexible as possible without causing additional stress or imposing costs of IR35 with carefully worded contracts.

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By Anonymous
01st Jun 2009 12:29

More good for nothing legislation
Presumably there has been a similar level of "success" in increasing revenue from the waste of time and interest free loan to the Government called "Construction Industry Scheme"?

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By Anonymous
01st Jun 2009 12:21

THE FEAR FACTOR
Simon, you have hit the nail on the head in your third paragraph.

"It is possible to argue that the legislation will have sucked in large quantities of tax and NIC through its deterrent effect"

The reason why HMRC and the Treasury will not revise IR35 IMHO is that many contractors would rather play safe and pay PAYE/NIC under the rules. Yes, they have the option of burying their heads or looking at one of the many offshore strategies which remove the IR35 risk altogether and produce higher returns. However when told by a professional advisor that their contract is caught under the IR35 rules, they likely to take this advice and pay the correct PAYE/NIC as defined by IR35.

It's the same principle of buying a parking ticket for a street which a traffic warden checks once a week. You are unlikely to have to pay a penalty but most folk would rather play safe.

There is more chance of Burnley winning the Premiership title next season than the IR35 rules being relaxed.

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By dgowens
01st Jun 2009 12:17

Solution to IR35
I think that the solution to the government’s problem with people avoiding National insurance can be solved by tax simplification.
· National Insurance should be scrapped.
· The lost tax revenue from employee’s NI can be recovered by increasing income tax; the loss of employer’s NI can be recovered from corporation tax.
· The national insurance numbers can be used for personal identification cards.
· All the petty social security rules surrounding NI should be abolished, with all NI number holders being entitled to the same benefits.

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By Basingstoke accountant
01st Jun 2009 12:00

What is it good for? Absolutely nothing, say it again
Originally Edwin Starr, covered by Bruce Springsteen and Frankie Goes To Hollywood, amongst others.

Great song, terrible legislation!

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By lpwcs
01st Jun 2009 11:57

The simple fix
IR35 as a tax may well be doomed, and I hope the PCG will persuade all parties of that come the next election. However, given that it did originally have a purpose, to prevent the Friday-to-Monday syndrome at the expense of the worker's rights, the solution is actually very simple. It should only apply to income gained from the client where that client is the same as your immediately previous employer. That won't stop people who genuinely want to go freelance, or who have been made redundant and have no other option, nor will it hurt all the 1.4 million existing freelancers currently unsure of their IR35 status.

Of course the real answer is to sort out a workable definiton of "Employment" and "Control". Trying to make that definition via a taxation measure is a clear symptom of this government's fiscal ineptitude.

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By jon_griffey
01st Jun 2009 11:55

IR35
There can be no doubt that IR35 is a really bad piece of legislation mainly because the question of employment status is such a grey, vague area and so there is never certainty as to whether an individual is caught by it or not. This being the case it is really hard to tell a contractor client that he probably should be operating IR35 when all of his contractor colleagues that sit in the same room are operating outside of it with impunity.

It is inappropriate to have laws that do not provide certainty and it needs to go. However something needs to replace it as I remember before IR35 cases where workers on a factory production line were all one-man limited companies which was completely absurd.

The central problem here is the differential of tax rates between employed v limited company and this is what needs to be addressed. Perhaps abolish small comapny rate of CT for service companies? Not that I am advocating that but it needs to be something like this that is simple and certain and that can be easy to police.

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By frauke
01st Jun 2009 11:54

Its a Joke!

Before IR35 Contractors were happy to trade under Ltd companies, and pay Corporation Tax, and sometimes - even some Income Tax.

I suspect that the amounts the HMRC lost was even more than the amounts it brought in! And all the costs involved.......

All IR35 did, was discourage trading using a Ltd company for Contractors and a number of schemes were set up involving Trusts etc etc etc,. to avoid IR35 etc and the HMRC received next to nothing in Tax...........

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By martin.jackson
01st Jun 2009 11:38

What is it good for?
That was Edwin Starr, surely?

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By J Lessels
01st Jun 2009 11:35

An anorak writes
Wasn't it Edwin Starr?

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