Professor of Taxation Law & a Lord agree government is in IR35 wilderness
Last week saw the second round of evidence presented to the House of Lords Select Committee on Personal Service Companies by the a number of witnesses during two separate sessions.
| Witness | Title & Organisation |
|---|---|
| Professor Judith Freedman | Professor of Taxation Law at Oxford University |
| Kate Cottrell | Managing Director of Bauer & Cottrell |
| Robin Williamson | Technical Director of Low Incomes Tax Reform Group of the Chartered Institute of Taxation (CIOT) |
| Frank Haskew | Head of Tax Faculty at Institute of Chartered Accountants in England & Wales (ICAEW) |
| Jason Piper | Technical Manager, Tax & Business Law at Association of Chartered Certified Accountants |
| Patrick Stevens | Tax Policy Director at CIOT |
What influences forming a PSC?
The Committee were keen to learn of the factors that cause individuals to set up their own PSCs. As well as an end client’s need to reduce headcount and the requirement for flexibility, Kate Cottrell pointed out that end clients are also concerned about employment rights claims and made the observation that a wide spectrum of workers are forced down the PSC route, from care workers to professional contractors.
Robin Williamson expanded on this by stating that many workers are given Hobson’s Choice, ie, “You work for us on these terms or you work somewhere else.” He also conjectured that the Department for Works and Pensions would likely refuse unemployment benefits where someone declined an offer of work that involved setting up a PSC.
The prestige of a corporate wrapper and the protection of limited liability was suggested by Jason Piper as being another driver for forming a limited company.
Tax and NIC savings are also an incentive but more often than not a by-product of using a PSC.
Simplifying IR35
It was originally intended that IR35 would be policed by employers but following consultation the burden switched to the PSC and changed, as Frank Haskew put it, to a “mass-market policing.” Piper propounded that perhaps the focus should be on the engagers/middlemen who are forcing workers into PSCs.
Earlier that afternoon, Williamson had declared his preference for a situation where the end client was made to observe their PAYE and NIC obligations. However, Professor Freedman believes that for this to be effective requires a different set of employment status tests because the current tests “rely on quite a lot of knowledge of the individual concerned.” Contractors in the construction industry have to make status judgements about their labour force using these tests so why would it have to be any different for end clients?
When Lord Levene of Portsoken queried whether nobody had got to grips with IR35 after 14 years, Haskew and Patrick Stevens were in agreement that that appeared to be the case. One of the problems however, according to Professor Freedman, is that neither HMRC or the Government knows what it wants to achieve from IR35, causing Lord Levene to remark, “It seems to me that they have totally lost the plot here.” Whether he was referring to the Government, HMRC or both, his comment may be equally applicable to both parties!
Professor Freedman confirmed that IR35 is not easily understood, nor easy to teach to her students!
Lack of policing
According to ICAEW figures, there are 600,000 companies that could be affected by IR35 but Haskew was willing to accept that HMRC’s estimate of 200,000 was realistic. Of these 200,000 PSCs HMRC only enquire into 250 each year, representing 0.1% of the contracting population. Haskew observed that this, “would suggest that either IR35 is an extremely good deterrent and works very well or that people who think they are within IR35 have worked it out and know what to do.”
Haskew went on to suggest that a proper policing of IR35 would involve 20,000 enquiries each year but to undertake such a commitment would require over 3,000 staff.
As far as Piper is aware, IR35 enquiries are conducted satisfactorily and quickly, although his main concern was with enquiries that are overlooked.
Stevens believes that examination of a PSC’s annual accounts is the normal catalyst for an IR35 investigation but this is not what has been played out over the last year and a half where most enquiries involve freelancers who have been contracting in the public sector.
Service standards
In response to a question raised by Lord Empey as to whether HMRC need to establish an agreed set of service standards for performance in the area of IR35, Haskew pointed out the Treasury Committee had made this recommendation, in general, to HMRC 2 ½ years ago but still nothing has been agreed. If a set of standards cannot be achieved for response times to post and telephone calls what hope is there for such in IR35?!
Fear factor
Some small businesses, according to Piper, want to reinvest capital to promote growth but because of their fear of IR35 these monies are instead being paid in tax. He said that he had witnessed individuals extracting company profits all as a salary and shunning dividends because of IR35 whereas had they carried out a proper analysis of their position their contracts would have clearly been outside of IR35.
Business entity tests (BETs)
Cottrell believes that BETs are being used as a status test and that they only serve to add confusion. She is concerned that contractors may mistakenly adjudge that achieving a low risk score places them outside of IR35 regardless rather than applying the tests to individual engagements.
A different type of helpline
Williamson would like to see a helpline that is easy to access and well publicised whereby a worker, particularly those low-income workers, could speak to HMRC in confidence to discuss and seek advice about their contractual arrangements that they are being asked to enter into but which they have reservations about.
Yeah right asking some HMRC numpty on the phone to provide unbiased tax advice is like asking a policeman for a legal opinion. Aside from putting yourself on the radar i.e. “I think I may have committed a crime can you help me” we have a group of tossers unable to reach a consensus after 14 years and incapable of deciding what they are trying to achieve.
With a 0.1% enquiry rate our policies must be very successful !!! Completely delusional and embarrassingly bad conclusions which are not elementary Watson.
How come nobody ever mentions the sheer unfairness and double standards of this..if caught by IR35 you are deemed a disguised employee of the end client and not your own limited company, you then pay all income as if it was a salary, paying tax and employee NIC’s….but then with their other hand they say you are an employer, a proper company…hand over your employers NIC’s ! This has always been about government greed wanting EE and ER NIC’s and having a distaste for any form of self employment. As for incorporation… in the 80’s you couldn’t work without a limited company because both the agent and the client needed to make sure that if you didn’t pay your tax the revenue couldn’t come after them….everything else then becomes a by product of that.
The fact remains that with VAT on all invoices before deductions ( a tax which cant be levied against an normal PAYE tax payer, plus , corporation tax, NIC , PAYE etc, HMRC is actually taking a large amount of tax from PSC’s. This debate over NIC is nit-picking… the real focus of attention should be on large corporations seeking to minimise their tax liability by offshoring etc… when will the various ” worthies” involved in this red herring wake up and stop wasting vast amounts of time.
Let’s spend 14 years of iR35 gleaned tax on enquiries to determine if IR35 tax is profitable for us then manufacture some unprovable figure called deterrence factor to cover our asses when we discover it isn’t. Then we can hire 3000 staff to spend all the money recovered so we can audit every last company and lose even more money.
Quite right Tom L @ #2.
I’ve been banging this drum for years but few people seem to understand that it’s the double whammy of EE and ER NI that’s the real issue.
Either you pay no NI via dividends (or as little as you choose) or you pay both on PAYE.
I’ve grown tired of trying to explain to people who say “Oh but it’s the Ltd Co that pays the ER NI” that the money in the Ltd Co is THEIR remuneration from the client, so it’s effectively like an employee who has to pay both EE and ER NI on their gross salary.
The PCG also refuse to “get” this but I’ve come to believe that they have another agenda – perhaps they think if IR35 were sorted out then their membership would dwindle.