Latest News - Ir35: It's Back, And It's Personal
Thursday Nov 3
Revenue taking a closer look at IR35
IR35: it's back, and it's personal
Just when you thought you had all the legislation boxes ticked......
As the contractor market faces up to working through the complexities of the Agency Workers Regulations (AWR) legislation, another piece of contentious legislation is once again rearing its head.
IR35, the legislation that came into force in 2000 as an attempt to stop workers gaining financial advantage by working through intermediaries when they are in fact in disguised employment, is once again in the limelight.
Following recent figures that revealed that HM Revenue & Customs (HMRCs) reviews of the tax affairs of individual contractors raised the grand total of 5,442,000 in the five tax years between 2007 and 2011, opponents of IR35 are once again on the warpath.
It just proves what we have always believed: that it is not bringing in much money, says Simon McVicar, head of policy and public affairs at the PCG (Professional Contractors Group). To provide further ammunition to critics of IR35, only 322 cases were opened during those five years.
David Mount, managing director of First Option Group, advisers to the freelance market, describes IR35 as pretty much unworkable, and ould like to see a return to pre-IR35 days. We would support a system that enables the entrepreneurial to get a tax advantage by starting their own business, he says.
However, all the indications are that Mount, and others who wish to see the end of IR35, are barking up the wrong tree. For after a review of IR35 by the Office of Tax Simplification the government seems firmly set on retaining this controversial legislation. Not the least of its reasoning is the potential revenue loss to the Exchequer (see box, overleaf). It is not ideal, but no one has come up with an alternative, so you have to accept that IR35 is here to stay, says Paul Mason, manager contractor division at Abbey Tax Protection. However, that is not to say it will be business as usual in the contractor market. While choosing to retain IR35, the government has also committed itself to improving the way that IR35 is administered. This, it believes, will give a welcome boost to an important part of the UK business community.
To help in this task, the government set up the IR35 Forum, including representatives from the sector to advise.
So how could IR35 be improved? The way it could be improved to the benefit of all would be to have clear indications as to who is outside of the IR35 remit, suggests Kate Cottrell, managing director of IR35 advisory firm Bauer & Cottrell and a member of the forum. Cottrell says she favours a risk-assessment approach, in which only those who are most likely to be in disguised employment have their tax affairs reviewed. She says that individuals who are standing in the shoes of permanent employees and working in the public sector, such as social workers and nurses who run limited companies, would fall into the high risk category.
However, she accepts that HMRC will have its work cut out: It is challenging because of all the different types of people affected by IR35. The PSC [personal service company] veil covers a multitude of occupations from plumbers to interim managers.
Cottrell suggests HMRC comes up with a dozen examples illustrating the types of scenarios in which individuals fall inside and outside the scope of IR35. Greater clarity will not only be good for contractors but for agencies, as much time and expense will be saved by not having to amend written contracts or deal with HMRC challenges to IR35 status, she argues. Provided everyone can agree common scenarios with the revenue, and there is public agreement on guidance indicating those people that are outside of IR35, that has got to be good news for everybody, she says.
However, Mason says HMRC will be hard pressed to do anything but tinker with the IR35. In his view, the legal tests for whether contractors are inside or outside of IR35 cant be improved on. Deciding whether a worker is inside or outside of IR35 will continue to be based on existing tests, he says.
The aim of the Intermediaries Legislation (better known as IR35) is to target disguised employment. This occurs where a worker provides his services through an intermediary, usually a personal service company (PSC), even when that worker is not actually self-employed or in business on their own account.
The government wants to deter this practice as it allows workers to pay themselves in dividends rather than in a salary, thereby avoiding National Insurance Contributions and reducing their tax.
If a worker is caught by IR35, the broad effect is for the companys income to be treated as personal income for purposes of National Insurance Contributions and Income Tax.
Why the government decided to retain IR35
An HMRC spokesperson told Recruiter: Individuals who seek to disguise employment relationships by providing their services through an intermediary company continue to represent a substantial risk to the Exchequer.
In addition to the direct yield as a result of compliance activity by HMRC, IR35 also encourages voluntary compliance and deters thosecurrently in employment relationships from operating through intermediary companies purely for the purpose of avoidance. Without IR35 there is a risk that intermediaries for the purpose of avoidance would increase substantially.
Kate Cottrell, managing director of IR35 advisory firm Bauer & Cottrell, estimates the risk to the Exchequer at 500m.
When is a worker with their own personal service company (PSC) outside the scope of AWR?
Kevin Barrow, a partner in Osborne Clarkes recruitment sector team, says: A PSC worker will be outside the scope of the AWR if he passes the self-employment tests in Regulation 3 of the AWR. The Reg 3 test is similar to the outside IR35 tax tests.
In practice, many PSCs wont pass the Reg 3 test, which defines whether a worker is an agency worker or self-employed. However, most of them are likely to claim they are outside IR35 and would be unlikely to bring an AWR claim because that would imperil their favourable tax status outside IR35.
Bringing an AWR claim could cost them more in tax than they could gain from an AWR equal pay award. There will be some low-paid exceptions to this rule of thumb.
Source: www.recruiter.co.uk - 19 October 2011
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