Contractor accountant tells Lords keep IR35 as it is
This Monday saw the turn of four representatives from specialised contracting industry bodies giving evidence to the House of Lords Select Committee on PSCs, those being:
- Chris Bryce – Chief Executive of the PCG
- David Ramsden – Taxation and Financial Affairs Policy Chairman of the Federation of Small Businesses
- Martin Hesketh – Managing Director of Brookson Accountants and Member of the Freelancer and Contractor Services Association
- Samantha Hurley – Head of External Affairs, APSCO
Why is a limited company the preferred choice of business vehicle for contractors?
According to Ms Hurley, recruitment agencies have no power in the contractual relationship and therefore cannot influence a freelancer to operate as a PSC. PSCs are therefore driven by professional contractors and not by any other party. Is this your experience?
Chris Bryce refuted the notion that the tax advantages of setting up a limited company was the main influence in a contractor’s decision. Rather, the corporate wrapper gives the freelancer more credibility within the commercial world.
Being genuinely self-employed, said Martin Hesketh, allows contractors to choose to operate through a PSC. Well the same is true of a sole trader isn’t it? He then went on to say that the majority of PSCs are owned by the more higher paid contractors as the MSC legislation had eliminated any advantages of low paid workers using a limited company. Indeed, it had been a success in curtailing industrial scale tax evasion and avoidance.
Effectiveness of IR35
The discrimination of IR35 was highlighted with an example given by David Ramsden who pointed out that a one-man company offering intellectual services is within the scope of IR35, whereas a similar company involved in manufacturing is not.
Hesketh however believes that IR35 is as fit for purpose as it has been in the past, an opinion not shared by Messrs Bryce and Ramsden. He went on to say that case law produces the right answers and the time and effort expended by contractors in risk assessing their IR35 position is not disproportionate.
He then stated that if HMRC accelerated their IR35 enquiries this would not pose a massive problem to the contracting industry. Chris Bryce on the other hand believes that such a move would be disruptive and discourage new business start up. Bryce said that contractors made a £95 billion annual contribution to the UK economy and IR35 did nothing to help this. Each year, contractors spent an average of £843 in dealing with IR35, said Mr Bryce.
Is it possible to come up with a clear definition of what is inside/outside of IR35?
As nobody has yet been able to produce a better version of IR35 then Hesketh argued that it should be left alone. To produce a statutory definition would be a mistake. Again, this opinion was not shared by Ramsden who believes there should be a statutory right to self-employment.
APSCO do not want to see legislative changes as this would be costly to their members, but Hurley would like long term legislation introduced that is not based on case law.
The Business Entity Tests (BETs) should be refined, said Bryce. He pointed out that the PCG had originally suggested six additional questions and a different scoring method to what we have now. He said that IR35 should be replaced by different legislation.
What percentage of contractors pay themselves low salary, high dividends?
No data exists, according to Bryce, but he did point out that there exists a quid pro quo, in that the right of a contractor to extract profits in such a manner is balanced by the fact that they have no employment rights.
If dividends were to be subject to NIC then, said Ramsden, the IR35 problem would evaporate.
Has HMRC’s IR35 administration improved since May 2012 and what one thing would you change?
Hurley said the guidance was still difficult although the six scenarios are helpful. She would change the BETs in terms of weighting and made the very good point that they are being incorrectly used as the employment status test by the public sector.
Improvement of knowledge, understanding and enforcement effectiveness is what is required according to Hesketh, who would also like to see HMRC become more bold in communicating what is good and bad IR35 practice. He is also supportive of the work of the IR35 Forum but, on this point, he again found himself in opposition to David Ramsden.
Ramsden is under the impression that the IR35 Forum is simply a HMRC “box ticking” exercise and that the Revenue does not take any notice of what external members have to say, e.g. the PCG’s suggestion with regard to BETs was never a starter because it was not HMRC’s idea! He would like to see IR35 scrapped but was realistic that this would not happen, so in absence of this dream, IR35 should be made simpler and the BETs made completely clear.
True to their word, HMRC are closing down enquiries more quickly, as acknowledged by Chris Bryce but he said there was a lack of transparency from HMRC on the IR35 Forum. For instance, HMRC have stated that IR35 has protected revenues of £475 million without actually providing data to back it up.
No-one appears to have mentioned that you can’t operate as a freelancer without a PSC as the end-client will not offer any contract unless they are clearly seen to not be liable for any tax/NIC.
If the agencies have no power to make freelancers operate as a PSC why do they always insist you work through a ltd company and not self employed – just shows how uninformed the so called “experts” are
“If dividends were to be subject to NIC then, said Ramsden, the IR35 problem would evaporate.”
The IR35 problem would also “evaporate” if NIC was scrapped. This is my preferred solution.
Who is this deluded Samantha Hurley? Does she REALLY believe that “recruitment agencies have no power in the contractual relationship and therefore cannot influence a freelancer to operate as a PSC.”
In my experience, all employment agencies prefer freelance workers to operate through a limited company (and will inevitably direct fresh-faced contractors this way), with only a limited choice of selected umbrella companies as a possible second option.
I know of not one single recruitment agency who (APSCO affiliated or not) that does not operate this way. Many end clients have little interest in the contractual relationship, abdicating that responsibility to the agency.
If not delusional, she clearly has little idea of how her members operate.
Further more regarding “Hesketh however believes that IR35 is as fit for purpose as…”. It is no surprise that a “contractor accountant” who is working in an industry that benefits from such complex tax law that he is unlikely to be a turkey voting for Christmas!
Agencies may not technically have the power (in law) to enforce a PSC but they can refuse to do business with those who don’t so that.
They won’t allow self-employed (Sch D) status because there are laws that may make the agency liable for the tax/NI – they won’t take that risk.
If someone insisted on going that route, they would pocket their cut of what the client pays as normal and simply put the contractor on the agency payroll with the rest. That means that the contract rate that is normally delivered into a Ltd Co would have tax deducted at 20% and 40% (if appropriate) and also both Employers and Employees NI.
This is the net pay an employee would get… except that Employers NI has also been deducted. Effectively you get the employee/worker paying both forms of NI.
The worst possible outcome – employers NI at 14.5% throughout earnings is a very big hit on top of all the other deductions.
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