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Business entity tests: What you need to know

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11th May 2012
Editor in Chief (interim) AccountingWEB
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Some of the people closest to the IR35 improvement project have been trying to soothe angry reactions to the publication of HMRC’s pilot business entity tests.

The business entity tests that were published on Wedensday 9 May were discussed extensively by the IR35 forum, and were welcomed by Office of Tax Simplification tax director John Whiting for the collaborative way they were developed. “Let’s see how the pilot tests work in practice, monitor the results, and then argue for abolition or retention of the system based on what happens,” he said.

Whiting’s view was echoed by IR35 Forum member Kate Cottrell, who said: “The tests are a minor part of the improvements made to the administration of IR35, but are being blown out of all proportion by some.”

Business entity tests
Low risk: 20+ pts; Med risk 10-20pts; High risk <10pts

Business premises test  Does the business have its own premises? (Yes = 10pts)

PII test - Does contractor have PII? (Yes = 2pts)

Efficiency test - Can business increase revenue through efficiencies? (Yes = 10pts)

Assistance test - Does employ workers who bring in 25% of turnover? (Yes = 35pts)

Advertising test - Has business spent £1,200+ on advertising in the past year? (Yes = 2pts)

Previous PAYE test - Has end client engaged contractor without changing working arrangements? (Yes = minus 15pts)

Business plan test - Does business have a regularly updated business plan and separate bank account? (Yes = 1pt for each answer)

Repair at own expense test - Would business have to bear cost of rectifying any mistakes? (Yes = 4pts)

Client risk test - Has the business failed to recover payments mounting to more than 10% of turnover in past two years? (Yes = 10pts)

Billing test - Does business invoice for work and negotiate payment terms? (Yes = 2pts)

Right of substitution test - Can the business send a substitute? (Yes = 2pts)

Actual substitution test - Has business hired anyone to carry out work in past two years? (Yes = 20pts)

Source: HMRC Business Entity Tests

That’s not to say that Cottrell supports the tests (see right) - “I still think that they add an additional layer of complexity to IR35, which is most unhelpful” - but they were what the government promised to deliver back in 2010.

The business entity tests open a new chapter in the 13-year IR35 debate. This article will sketch out the main arguments that have been raised about the tests. Feel free to join AccountingWEB’s IR35 reform discussion group if you would like to continue debating the following issues in more detail:

Project scope

In its 2010 small business taxation review, the OTS argued for a suspension of IR35, but due to the potential risk of lost revenues, the government would not sanction the suggestion. Instead, it adopted the principle that letting businesses “self certify” their IR35 status could potentially offer them more certainty. The OTS commented: “If the government commits to integration of income tax and NICs the OTS was that this option is a viable short term measure to moderate the problem of IR35.”

The Overview of Tax Legislation published in the March 2011 Budget laid out the terms of reference for the IR35 improvement project:

  • To provide greater pre-transaction certainty, including a dedicated helpline staffed by specialists 
  • To provide greater clarity by publishing guidance on those types of cases HMRC view as outside the scope of IR35
  • To restrict reviews to high risk cases carried out only by specialists teams; and
  • To promote more effective engagement with interested parties through an IR35 Forum to monitor HMRC’s new approach.

To give the department its due, this is precisely what it has delivered.

Internal focus rather than taxpayer experience

As part of the IR35 improvement package, around 36 specialist staff will be organised into three teams based in Salford, Edinburgh and Croydon. When they pick up a case for enquiry, the teams will take into account a contractor’s reasoning and evidence why IR35 does not apply to them rather than asking for a long list of documents, HMRC said.

The department will also strengthening its helpline/review service for contractors, which will be handled by specialist staff.

The government’s original rationale for the OTS was to lessen the burden on taxpayers and make the tax system work better for them. But with IR35, what started as a review of dysfunctional legislation became an exercise to improve efficiency within HMRC -  a classic case of bureaucratic capture.

HMRC confirmed that consolidation and specialisation will lead to an increase in the number of IR35 investigations. In their defence HMRC and its Treasury masters would argue that more efficient risk assessments, based partly on the published tests, will mean that only those most likely to be abusing the tax system will be investigated.

John Whiting supported this view: “Consolidation into three teams is constructive: investigations should be undertaken on the same principles and pursued by people who know what the rules are. They will certainly be able to undertake more reviews, but they will be focused on more real reviews: looking into 10 real cases rather than annoying 100 people and ending up with five.”

But the PCG and many AccountingWEB said the business entity tests added to the complexity surrounding IR35 rather than simplifying it. “HMRC appear at this stage to have opted for a risk-averse approach that will not deliver the improvements that are so clearly needed,” complained PCG chief executive Chris Bryce. Ann Swain of APSCo added that several external members of the IR35 Forum were exasperated by HMRC’s reluctance to listen to their advice concerning the new tests.

Targeting accuracy

AccountingWEB member Ringi accepted the principle that HMRC’s tests could help if they put contractors into low risk category. “However I don’t see how they help with most contractors/freelancers as they all mostly still in the grey area… My clients tell me that none of them are offered any assistance by these tests,” he wrote.

The clients in question generally work from home, do not advertise, work without dependence on assistants and so on. “Are they now to be considered more high risk under existing case law than this time last week? Hardly I would say.”

Several of the tests come in for individual hammerings, but FCSA’s representative Martin Hesketh and Dave Chaplin of ContractorCalculator.co.uk felt the entire package was compromised. “The net has been cast so wide that anyone who is providing personal services by a limited company is considered medium or high risk. They could just replace all the tests with one question: Are you a service company? If yes, then you are potentially at risk,” said Chaplin.

The test questions are not based on the most important aspects of IR35 case law, yet seek to draw a conclusion about IR35 risk. And the implication that anyone who isn’t in the low category is at risk of IR35 “is a bit like trying to locate people in Europe by considering anyone who doesn't live in China”, he added.

AccountingWEB member Roland195 came up with this: “I imagine there are all sorts of creative types coming up with business directories that cost £1,201 to list in (and offer surprisingly generous free gifts & other incentives) and we will no doubt hear of 3-bed semis that 500 workers have rented work space in (at the same time) and there will be ‘IR35 Compliant/Proof Business Plans’ that will have HMRC officers experiencing the strangest feelings of deja vu. That's 13 points already and into the medium risk category.”

The bad debt test, meanwhile, perplexed Taxwriter, who wrote: “I can't believe HMRC think you have to have 10% bad debts to demonstrate that you are self-employed. If any of my clients had 10% bad debts I would be sending them back to school or telling them to get a job. 1% seems like a more reasonable figure.”

The debates that took place within the IR35 Forum reportedly got quite heated, and the PCG has complained that some of the tests it put forward were ignored. AccountingWEB member mfwiniberg picked up this theme by asking why some of the following points were not included within the business entity tests:

  • supplying goods to your clients at a profit.
  • providing your own equipment and running costs to do the work
  • working for multiple clients and controlling the hours you work for them
  • charging by time worked
  • working for clients without a contract verbal or written.

“There is a reason that these are no longer mentioned by HMRC,” answered FrustratedwithHMRC. “This is that HMRC have an irritating habit of losing tribunal hearings and court cases when these things are mentioned…

“While HMRC continues to inhabit its fantasy dream-world of risk profiles and online tests they will continue to lose case after case to those lawyers and tax attorneys whose feet is firmly bedded in the reality of law and legal precedent.”

Legal basis

FrustratedwithHMRC and other critics argue that the business entity tests are based on a fallacy. Legislation and case law have not changed, so many of the tests are irrelevant to the factors a tribunal judge would consider to determine the nature of the notional contract that existed between a contarctor and end client (particularly control, substitution and mutuality of obligation).

“These are clearly written by people who have never ever run a service business,” wrote Neil W. “10 points if you rent an office and then this: ‘Does the business have the right to send a substitute? (2 points if yes)’.

“That is and always has been a 100% killer in case law. Employment *requires* personal service. If you can delegate work to anybody you choose then that is the end of the matter.”

The cynical interpretation, to which there are many adherents, is that the legally dubious business entity tests are designed to convince individuals that they fall within IR35 after using what they perceive as official guidance on the subject.

“Are they hoping these documents push taxpayers to correctly appraise and self-assess liability to IR35 and come forward?” asked Andrew Driver. “I suspect like numerous other disclosure opportunities there will be very poor returns in this field. They still seem like they are clutching at straws and until they start winning some tribunal cases enforcing IR35 I don’t think contractors will be too concerned by these announcements.”

Political fallout

The technical debates around the points raised are likely to continue for the next 12 months. But long-term opponents of IR35 are faced with a choice between participating in the pilot process, or stepping up their opposition on the political front.

“Appeasement never works,” argued NeilW. “That the Chancellor has refused to amend the law, and instead has set attack dogs in motion again is entirely the problem. The law is unworkable and needs scrapping. There is far too much ‘striving to make it work’, when the simple and fair solution is to put the risk onto the clients. If you treat your contractors like employees, then that is what you will get.”

Following the pasty tax furore, “granny” tax and botched child benefit changes, the last thing the Chancellor needs is another tax policy embarrassment.

But as NeilW hinted, avoiding income tax and NICs by using intermediary companies is already a political issue because of the controversy over senior civil servants acting as contractors to government departments. Many commentators pointedly asked if HMRC will be assessing these 2,000 people against the published risk ratings.

IR35 won’t get as many headlines as some of the other issues, but the issue does have the potential to hurt the Chancellor while he’s vulnerable. AccountingWEB members pointed out that he has reneged on a campaign promise to shelve IR35 and effectively undermined tax simplification efforts.

The political reality is that IR35 is still with us, so we’ll have to heed those who advise testing the new mechanism and pushing for further improvements when the results are in. But as we go through the process, the Chancellor will be further alienating some of his party’s key supporters: independent contractors and quite a few accountants who work on their behalf.

Replies (19)

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Chris M
By mr. mischief
11th May 2012 20:18

is it really a worry?
I don't think I need to worry about this. IR35 is pretty much dead in the water in terms of how HMRC has been going with its cases. My clients at risk of IR35 all have tax protection insurance, they are all keeping diaries of when the contractor treated them differently from the employee folk, and so forth.

So I simply say to the muppets at HMRC - bring it on!

Thanks (2)
Replying to cstwragby:
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By frustratedwithhmrc
13th May 2012 10:29

So, we're all getting back onto the same IR35 merry-go-round...

mr. mischief wrote:

I don't think I need to worry about this. IR35 is pretty much dead in the water in terms of how HMRC has been going with its cases. My clients at risk of IR35 all have tax protection insurance, they are all keeping diaries of when the contractor treated them differently from the employee folk, and so forth.

Agreed. HMRC had an excellent opportunity to correct some of the inherent failings of how IR35 is being operated.

Although the Business Entity approach is the right approach to take, the tests and their scoring bears no relation to reality and so I will be recommending to my clients that they follow the approach that has been developed by the various tax specialists and laid down by David Smith in IR35 Defense Strategies.

All clients should have contracts written and agreed with end-clients incorporating as many of the IR35 specific points as they are both comfortable with (mutuality, control, substitution, etc.) and contracts to reflect ACTUAL delivery. Tax investigation insurance of at least £75,000 from Abbey Tax or equivalent quality supplier.

All letters from HMRC which might be the start of an inquiry or PAYE/NI/IR35 fishing expedition to be handed over to IR35 insurance specialists without direct response to HMRC from client or ourselves.

If required, pursue through courts and tribunals to the maximum extent possible (primarily driven by insurance coverage and support from 3rd parties such as PCG) and make it clear to HMRC you do not accept their IR35 determinations at any point and will go all the way.

Until IR35 is repealed we will continue to take this approach.

I don't think HMRC really understands how badly IR35 has soured the relationships between themselves and clients / agents over the past 13-years. The fact that it has done this without actually bringing in any money (after deduction of investigation costs) is a criminal waste of taxpayers funds.

Thanks (2)
Replying to sosleepy:
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By dstickl
13th May 2012 11:32

FAO: Mr John Whiting-Pl proactively support intro of "Age test"!

frustratedwithhmrc wrote:

I don't think HMRC really understands how badly IR35 has soured the relationships between themselves and clients / agents over the past 13-years. The fact that it has done this without actually bringing in any money (after deduction of investigation costs) is a criminal waste of taxpayers funds.

Thanks & Agreed; and it's for these reasons of bureaucracy, etc, that I'm passionate about seizing the opportunity of removing the risk of OAPs - who have to work in their old age because they suffer: (1) food price inflation > RPI or CPI as measured by ONS's basket of goods and services bought by UK's population, (2) reduced annuities due to HMG's Bank of England's "Quantitative Easing" policies & practices, (3) reduced interest on OAPs' savings (again due to HMG's Bank of England's "Quantitative Easing" policies & practices), and (4) etcetera, - from being caught in the very messy IR35 net AND having to charge clients for employers' national insurance contributions (NICs), especially when UK's Tax Minister Mr Danny Alexander MP seems to me to think that pensioners over 65 "Do not have to pay NICs!".

SUM UP:  IF Mr John Whiting and OTS and CIOT really believe what they say to us about the HMG/OTS/HMRC tax procedures for the affairs of old people, THEN: Please ask him/them proactively support the introduction of an additional / new IR35 Business Entity Test question, to those already published by HMRC, of:

*  "Contractor's Age test - Is the contractor aged greater than State Pension Age? (999 points if yes)".

Of course, if HMRC's proposed system can only deal with two digits, then score 99 points (if yes).

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By dstickl
12th May 2012 18:27

Ameliorate political fallout of granny tax by new IR35 B E T Q ?

Hi John Stokdyk!   May I politely request - when you next contact John Whiting, etc - that (to ameliorate political fallout of granny tax, etc) you please ask him (etc) to consider an additional / new IR35 Business Entity Test question, to those already published, of the form:

*  "Contractor's Age test - Is the contractor aged greater than State Pension Age? (999 points if yes)".

Of course, if HMRC's proposed system can only deal with two digits, then score 99 points (if yes); as, for your easy reference, I previously set out in this AWEB link:-

https://www.accountingweb.co.uk/anyanswers/question/ir35-2#comment-558692

Here are some rationales to support a  "Contractor's Age test", for consideration:

(1) IF HMRC really does support the Chancellor's Budget 2012 for growth, THEN surely it's better that people over State Pension Age (SPA) are in work, creating economic activity for the UK's economy, rather than on the street or buses, or causing extra public expenditure through pre-mature dementia/altsheimers/etc and associated NHS or care home costs.

(2) Haven't the necessary contributions needed by the state already been paid by and for such OAP workers, through the NIC records?

(3) Don't the advances in computerisation since the post WW2 introduction of the NIC scheme mean that employers can now efficiently distinguish between workers aged below and above SPA?  

(4) With the intellectual/skills capital of workers > SPA, isn't it sensible to unleash same, especially as an ageing population demands sufficient workers, and immigration is now discouraged by HMG due to the costs of congestion, etc?

Thanks (1)
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
14th May 2012 09:22

@dstickl - I see you've gone for the tactical option

Thanks for your comments here and elsewhere, dstickl. As AccountingWEB's most active anti-IR35 campaigner, I'm very interested to see you taking a tactical stance on the business entity tests - if we're going to have to live with them for a year, at least, I can see a lot of sense in bringing in a few more conditions designed to exempt businesses with "good" characteristics, such as the retired contractors you describe.

Danny Alexander may have made that mistake on NIs for the over-65s, but that is the specific reason Treasury minister David Gauke ruled out a merger of income tax and NICs last November.

I think you're making some interesting points here, and be assured that John Whiting and senior HMRC officials do pay attention to what is posted on AccountingWEB. 

but could I ask you to summarise the Contractor's Age test conditions and criteria in our IR35 reform discussion group? That will provide an easy access point for further discussions on the proposed test, and a more permanent record of the points for and against.

I'll see what I can do to bring forward a few of the other suggestions formulated by the PCG but ignored by HMRC in its guidance note.

Thanks (0)
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By dstickl
14th May 2012 10:24

@JohnStokdyk: Thanks, and "Age test" update done ...

Hi John! Thanks for your kind comment, and because the proposed Contractor's Age test criterion is to draw a line whether, or not, the contractor is over or under 65, or whatever SPA (UK State Pension Age) evolves to, it should be easy to apply by HMRC, and be seen to apply.

As HMRC has had a court/tribunal ruling that a contract - or a series of contracts - may be part-inside IR35 and part-outside IR35, then the revised IR35 "Age test" condition would be to apply (or not apply) IR35 accordingly.

Please see update on this link:_

https://www.accountingweb.co.uk/group-thread/business-entity-tests-detai...  

Thanks (0)
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By ronwelsh
14th May 2012 13:51

Business Entity Tests - Crass

If I am correct in my calculations, the maximum "score" achievable is 98 points.

 

However, for those individual freelance contractors whom:

- (sensibly) choose not to have business premises

- charge by the hour

- have no other staff

- don't have (ridiculous) bad debts

- enjoy good health (haven't sent a substitute)

 

The maximum possible is 13 points. Medium risk.

 

In my opinion, this means in excess of 99% of individual contractors will at best be medium risk.

 

Now that m'lud makes these Business Entity Tests utterly useless, utterly unworkable, and completely unhelpful.

But you knew that already didn't you?

Thanks (1)
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By Ian McTernan CTA
14th May 2012 13:59

Age tests..

Dsticki, 

You forgot to mention the biggest sting of them all for pensions: Gordon Brown's 'removing a tax' when Labour came in and at a stroke reducing the pension funds ability to reclaim tax paid on dividend income, and making final salary schemes unaffordable and reducing everyone's potential pension pots, or how about 'Labour's prolifigate spending and creating artificial growth in the economy which now needs to be reversed'.

On topic, I'm starting to feel sorry for the Chancellor as he gets boxed in by HMRC and the Treasury and forced to adopt these measures on their advice.  It's the civil servants (or jobsworths as real working people call them) that have an ingrained interest in keeping the tax system complex as it keeps them all in a job- they are hardly going to support something that might mean some of them are out of a job!

Of course creating it's own special department tells you only one thing- the Treasury and HMRC will fight tooth and nail to keep IR35 no matter what any politician wants to do.

I wonder which Labour chancellor approved of all those civil servants being 'contractors'?

 

 

Thanks (0)
Replying to NYB:
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By dstickl
14th May 2012 20:45

@hopkins-hohg:Feedback on your "Contractor Age test" comments ..

Hi hopkins-hohg!  Thanks for your comments on the proposed IR35 "Contractor Age test". Here's some feedback:- 

hopkins-hohg wrote:

Dsticki, 

Just for clarity: my login nickname on AWEB is "dstickl", short for "Don Stickland" 

hopkins-hohg wrote:

You forgot to mention the biggest sting of them all for pensions: Gordon Brown's 'removing a tax' when Labour came in and at a stroke reducing the pension funds ability to reclaim tax paid on dividend income, and making final salary schemes unaffordable and reducing everyone's potential pension pots, or how about 'Labour's prolifigate spending and creating artificial growth in the economy which now needs to be reversed'.

Correct! I tried to keep that post short! BUT if I draw up a ppt for presentation to Mr John Whiting, etc, I'll try to include your "pensions raid etc" point; thanks.

hopkins-hohg wrote:

On topic, I'm starting to feel sorry for the Chancellor as he gets boxed in by HMRC and the Treasury and forced to adopt these measures on their advice.  

Understood. IMHO some "civil servants" behave like "drivel servants".

hopkins-hohg wrote:

  It's the civil servants (or jobsworths as real working people call them) that have an ingrained interest in keeping the tax system complex as it keeps them all in a job- they are hardly going to support something that might mean some of them are out of a job!

Yes; IMHO it's a demonstration of Gresham's ecnomic law - that the bad drive out the good. (Unless the good have courage, of course!)

hopkins-hohg wrote:

Of course creating it's own special department tells you only one thing- the Treasury and HMRC will fight tooth and nail to keep IR35 no matter what any politician wants to do.

Up to a point, hopkins-hohg! IMHO a "special department" could provide a focus of attack by Ministers, & MPs, and the PAC could force "civil servants" to give evidence under oath - just like that HMRC lawyer - whatever Lord Augustine O'Donnell (the enobled ex-Cabinet Secretary) squawks, so that they would know that they could be charged with perjury [and be furnished with hand cuffs, if needed] if they did not tell democratically elected MPs the FULL truth about the taxation of the electorate.

hopkins-hohg wrote:

I wonder which Labour chancellor approved of all those civil servants being 'contractors'?

A partially blind one, perhaps, who apparently sometimes lacked the capability to see the full implications of what s/he was doing, especially if they did not have a sound grounding in mathematical sciences, perhaps?  I think we should be told, specifically, who made the "decision" in each case, for each of HMG's 2,000 NPWs, don't you?

Thanks (0)
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By chEEK
14th May 2012 14:21

Merger of NI and income tax does not help

Just to point out that any such merger would be Employees NI (EE NI) with income tax - the real injustice of IR35, however, is Employers NI (ER NI). Since ER NI is a business tax it would not be rolled into income tax. Those who are caught are effectively paying both forms of NI on their income - a worse than double-taxation issue.

If that doesn't sound right then have a look at this comparison of different ways of working:

 http://www.shout99.com/contractors/showarticle.pl?id=70964

It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?

How could all those "experts" not get the most fundamental aspect of IR35's unfairness across to the Chancellor?

Thanks (2)
Replying to Nicky40:
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By dstickl
15th May 2012 06:44

Good point, @ chEEK!

chEEK wrote:

Just to point out that any such merger would be Employees NI (EE NI) with income tax - the real injustice of IR35, however, is Employers NI (ER NI). Since ER NI is a business tax it would not be rolled into income tax. Those who are caught are effectively paying both forms of NI on their income - a worse than double-taxation issue.

If that doesn't sound right then have a look at this comparison of different ways of working:

 http://www.shout99.com/contractors/showarticle.pl?id=70964

It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?

How could all those "experts" not get the most fundamental aspect of IR35's unfairness across to the Chancellor?

IMHO, the answer to your last question is lack of capability (including lack of capability in the 5 Rs of Reading, wRiting, aRithmetic (especially), Reasoning and Recall) of the very educated so-called "experts".    (Broadcaster Mr Andrew Neil might claim that this is due to the scrapping of Direct Grant Grammar schools "in the name of equality", a crime - apparently - equal to the dissolution of the monasteries, perhaps.)

Perhaps someone should draw up an easy-peasy pictorial powerpoint to set out IR35's unfairnesses? 

Thanks (0)
Replying to Caber Feidh:
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By chEEK
21st May 2012 15:26

Indeed - also apathy / lack of understanding

I think there's also a lack of interest from the PCG in dealing with the injustices of the Inside IR35 situation. They are hell-bent on repeal, despite their chairman having acknowledged that repeal is a dead duck, they refuse to see how this will play out and stick to a dogged, albeit now half-hearted,"The PCG remains committed to abolishing IR35".

 

Even if their business entity tests had been all they ever dreamed they might be, those inside IR35 would still be right up the creek in paddle-free mode. I see it as gross negligence of their responsibility to ignore this issue.

Thanks (0)
Replying to Nicky40:
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By ThornyIssues
15th May 2012 12:08

Not quite right

chEEK wrote:

It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?

IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.

 

Thanks (0)
Replying to Paul D Utherone:
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By dstickl
15th May 2012 12:59

@ThornyIssues:Regret I have 2 disagree on basis of "Acid Test" Q

ThornyIssues wrote:

chEEK wrote:

It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?

IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.

Hi ThornyIssues!   RE: Your "Not quite right" comment above, which IMO is not quite right of itself, because IR35 (A) firstly removes any alleged artificial links to determine whether a worker is a "disguised employee" of the alleged "end client", and then (B) in the same tax breath, so to speak, re-inserts those self same alleged artificial links to penalise the worker!  

May I again [as I did on 23/03'12] gently point out that - as part of the vogue for tackling alleged tax avoidance - HMT seems to make great play of "the spirit" as well as the letter of taxation?  So, here’s an ‘acid test hypothetical question’ to clarify:

IF a pensioner/worker aged over State Pension Age (who genuinely believed that s/he was not caught under IR35 as a ‘disguised employee’ after making a review of the then available facts) had (as Director) decided to leave insufficient funds in the ‘intermediary limited company’ to cover the alleged ‘employER NI payable’ as subsequently decided by HMRC - with the result that the ‘intermediary limited company’ were put into liquidation by HMRC trying to recover what NI monies allegedly due that they were able to - THEN could that same pensioner/worker be held liable by a court of law to personally pay the balance of the outstanding ‘employER NI payable’ monies?

Because IF the answer to this ‘acid test hypothetical question’ is ‘yes’, THEN it seems to me that the pensioner (over 65/SPA) would have to partly ‘pay ER National Insurance contributions’ and any EE NIC due (currently nil contribution required because there is sensible recognition that their NI record has been paid in full) – contrary to your above assertion of 'So there is no "employee" paying EE and ER NIC.'

For workers aged below SPA (State Pension Age) IF the answer to spirit of the above hypothetical question is 'yes', THEN your above assertion of 'So there is no "employee" paying EE and ER NIC' seems to me to be very wrong.

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Replying to Paul D Utherone:
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By chEEK
15th May 2012 19:22

Where did you get that calculation?

ThornyIssues wrote:

chEEK wrote:

It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?

IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.

I don't understand where you came up with the idea that the taxes are in any sense "put back in the pot" and then taxed with only income tax and EE NI.

 

I believe you'll find that in an IR35-caught case, all of income tax, EE NI and ER NI are notionally put back into the "the intermediary"  (i.e. the Ltd Co) and then taxed as if the Ltd Co is the employer and the freelancer the employee.

 

In the words of the Dim Prawn re ER NI "Somebody has to pay it" (totally wrong of course, since in a Sch D sole trader set-up nobody pays ER NI).

 

Also, it is important to bear in mind that this is a Ltd Co that is forced onto people (due to other legislation that means that agencies will only deal with Ltd Cos, not sole traders, in case they are deemed to be the employee) so the ER NI is, in real terms, a tax on the freelancer.

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Replying to clairechaplin1:
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By ThornyIssues
21st May 2012 15:45

Almost

chEEK wrote:

ThornyIssues wrote:

chEEK wrote:

It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?

IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.

I don't understand where you came up with the idea that the taxes are in any sense "put back in the pot" and then taxed with only income tax and EE NI.

I believe you'll find that in an IR35-caught case, all of income tax, EE NI and ER NI are notionally put back into the "the intermediary"  (i.e. the Ltd Co) and then taxed as if the Ltd Co is the employer and the freelancer the employee.

I beleive that is what I said - the pot being that of the LtdCo run by the freelancer and what HMRC call "intermediary". Thus what we have is the turnover in the pot to which 5% is allowable against "the expense of the business" and the remaining 95% being assigned to the employee (director) and taxed under PAYE.

 

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Replying to FirstTab:
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By chEEK
21st May 2012 18:11

Errr... no

You said: 

ThornyIssues wrote:

 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.

You stated that the remaining 95% were only subject to EE NI. It is treated as though it contains the ER NI (as if it had been handed over by the client/employer with an inclusive ER NI amount). That ER NI is payable as well as the EE NI. Therefore that employee is paying both EE NI and ER NI.

Also, bear in mind that the Ltd Co was enforced on the individual (due to S44 and its predecessor s134), then it is looked through for the purposes of constructing a notional contract... then it suddenly springs back to life and becomes liable for ER NI?

 

The unfairness aspect of this is described here with 3 worked example cases, employed, self-employed under Sch D and Inside IR35, all paid the same by the client:

http://www.shout99.com/contractors/showarticle.pl?id=70964

 

The numbers for Inside IR35 are slightly simplified (e.g. the actual calc strips out the ER NI rather than charging it on the full amount), but the concepts of how these are in the real world and how they are treated in the tax world are the important issue.

Hope this helps.

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By cverrier
15th May 2012 11:55

Right of Substitution

I always felt the 'right of substitution' test was the tricky one.  As a one-man service company, my business is closely tied to me as an individual (my personal reputation and word-of-mouth recommendations from clients).   With the best will in the world, very few of my clients would be that keen on my suddenly putting a sub-contractor into their offices.  I have the right spells and incantations in my T&C document, but the practicality would be very different, to the extent that I'd probably not be able to collect my points on that.

Even when I did have a proper job, I've often been on projects where I've been the only person in my company with the particular skills needed.  If I'd gone under the proverbial bus, the project would have been terminated.

Outside of large organisations where multiple individuals with the same skill-sets are available, the right of substitution just doesn't exist in any practical sense - regardless of the contract terms.

 

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By cverrier
15th May 2012 12:00

Client Risk Test

Wait.... so I get penalised 10 points if, as a small business owner, I do a good job of my due diligence when taking on new clients, and so don't have any bad debts?

I know a fellow contractor who lost a chunk of money when a client went under. Should I tell him the good news?

 

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