The Budget report includes the following paragraph:
2.207 Personal service companies and IR35
The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include:
- strengthening up specialist compliance teams to tackle avoidance of employment income;
- simplifying the way IR35 is administered; and
- subject to consultation, requiring ofï¬ce holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged. (Finance Bill 2013)
I can see no press release so this is all we have to go on but let's consider this at face value.
What it says is that all IT contractors will in future have to have PAYE deducted from payments made to their companies BEFORE those companies get them. That's the end of their self-employments.
And the same will be true of the army of consultants working for government.
And anyone with most of their consulting income from one client.
How many people will this affect? Hundreds of thousands; maybe more.
Now I welcome this: these people are employees and should be taxed as such. That is obvious. An unlevel playing field has existed on this issue for far too long and as such I welcome this measure. But Osborne is going to alienate one of his key constituencies with this move by the look of it. And that's another political own goal by this supposedly most politically astute of chancellors.
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1) It’s an attack on individuals who are integral to the end user, not integral to the intermediary – the Ed Lester cases, not run of the mill small business, so not what you’re suggesting at all. It’s more like the IR35 Mark 1 that the likes of PCG have been asking for/lamenting the loss of for years, but purely for top end contractors (I suspect as a knee jerk reaction to the specific cases recently dug out by Exaro and friends). So it’ll just be a further complication in parallel to the existing discredited regime.
2) I’m afraid it looks from your drafting like you’re saying all IT contractors are employees and should be taxed as such. I’ve seen some rude things written about you elsewhere, which I’d not normally repeat, but if this is really the stance you’re taking, then I’m afraid I’d join them in impugning your grasp upon reality.
IT contractors who stay for years at one place are employees
And are integral in that case to their employers
I have a decided grasp on reality
It comes from being senior partner of a firm of accountants for many years
And being honest
I agree, if they stay there too long then it can be disguised employment, and the tax should be paid – but that’s by no means every case, which is what your first post seemed to say.
On the integral bit, they are going after individuals who are Directors or Officers of the end user, not of the intermediary, and integral to the control of the end user, as opposed to merely its operation. (Integral to operation is a difficult test with the rise of outsourcing)
On IR35 itself, the first 2 points seem to reflect the work of the IR35 Forum, but this third bullet is something new and extra.
Well, that’s not how it reads to me
But if it is then it’s only aimed at the Student Loan Company
A consultation would not be needed on that
IT contractors who only work for one firm are, arguably, employees. Those who work, even over a long period, for more than one employer with a service rather than an employment contract are not.
As a (non-IT) contractor who has retained his main client for the best part of 20 years on terms that (i) pay for a product not for hours worked, (ii) include none of the benefits or disbenefits (such as a 48-hour week) attaching to employment, (iii) allow me to undertake underpaid or “pro bono” work in transitional economies or for charities and allows it to cancel without notice, while working for a variety of other firms, I have no doubt that I am self-employed
I think you’re looking at some weird ‘badges of trade’ there
What you do in your own time has nothing to do with the contract status
Richard, I agree with your principled stance on IR 35 but will HMRC enforce it?
They have had a decade to get their act together on it but pursuing the cases costs a fortune and realises very small amounts of tax.
They started only 25 investigations in 2010 according to the PCG.
Its not cost effective and industry likes the flexibilty of a transient, temporary workforce.
I suspect it’s more smoke and mirrors from Osborne.
You may be right of course
So much here is
I concede your point!
“What you do in your own time has nothing to do with the contract status”
Actually, it does! A normal employment contract would *not* have allowed me to take a month out to work for the World Bank in the Third World (let alone twice).
And so does the definition of “own time”.
I *do* want to see HMRC tighten up on tax avoidance through artificial service companies [which I decided not to use despite the tax break offerred by Brown because it just seem right], but you need to distinguish between genuine self-employed and artificial tax avoidance/evasion.
Hang on – you’re saying employers don’t grant people unpaid leave and that provokes your point?
I don’t think so!
As i said – that’s clutching at straws!
Richard, I think John 77 is self-employed. Badges of trade help you work out whether to calculate under DI, DVI or Capital Gains Rules. If you want to show employment, then it’s Control, Mutuality of Obligation & Personal Service; if you can’t show all 3 (and John’s mullered MOO & Control, and if there’s no obligation for service then it can’t be personal…) it’s not employment. Of course, if you can’t show those 3, but also can’t show enough Badges to be trading, you get dropped into a no-man’s land – there’s a case from the 70’s involving a court stenographer whose employment status was indeterminate (innominate?). I’ll bow to your detailed knowledge on illicit money flows & the NHS, but tax is too big to be an expert on everything these days, and this is one very specialised little area where, with respect, your technical knowledge doesn’t come across as expert; please note this doesn’t impact on the validity of your policy viewpoint – I think we’re all fed up with avoiders, it’s just how we define & catch them which we’re struggling with.
Well – it’s a decade ago – but I used to do and write quoite a lot on this issue
And I don’t think we know enough to determine this case – and I nobly expressed real reservation on one point
But I really don’t think it is as cleatr cut as Jophn is making out – and some of his hopes look very misplaced to me
And candidly – I think I retain plenty enough expertise in this area to say that much
By the way, many happy returns – this can’t be the best way to spend your birthday, but I hope (genuinely) that you do get teh chance for a decent celebratory meal some time soon.
And your expertise says that because I have worked as a self-employed contractor for a score of different companies/government organisations in nine different countries I should be defined as an employee of one company that is only authorised to operate in the UK?
No, you don’t know enough. So just accept that I do know and when I quoted myself as an example of those who were not trying to avoid/evade tax I am noy a total idiot trying to bring HMRC down on my head
If you’d have stated such things it would have changed matters wouldn’t it?
And you would not have wasted a lot of my time
For doping so you are now onb th3e spam list. It’s clear you’re trolling
Richard, what about someone who provides a virtual FD service (or virtual HR director, virtual marketing director, etc) to a small group of clients? They would then be taxed as an employee of all those clients – even though a master-servant relationship would be very unlikely.
And what about non-executive directors? They would be caught too.
M
M
Well, in theory they should be
NEDs always had to apply for a clearance in my experience – only granted if paid to a professional firm, as far as I knew
So the outcome you fear may be the one they are definitely driving at
Richard
Interesting, Richard. Would you think then that a virtual FD offering services to a small group of clients should be taxed as an employee of each client?
Not a loaded question, I’m just curious.
M
Theoretically the answer is yes
Actually – HMRC have allowed it as a trade if application is made to them to agree that is the case
They used to only give consent to professionally qualified people
R
That’s very interesting. What happens if the individual is not professionally qualified – e.g. a QBE FD?
So strictly speaking a virtual FD should apply to HMRC to be treated outside of IR35?!
I feel a blog post coming on!
M
That’s my understanding
R
Thanks Richard.
M
If that means an end to the scourge of ‘full-time freelance’ positions then it is surely to be welcomed.
Yes
because we all know that creates tax injustice
Richard
I read the details earlier and decided that the third point “subject to consultation, requiring ofï¬ce holders/controlling persons who are integral to the running of an organisation …..” was aimed at the likes of the head of the Student Loans Company. SJDAccounting seemed to agree with my thoughts elsewhere on the internet.
Having read the paragraph again I’m not so certain. When IR35 was introduced I went to a Peat Marwick post-budget meeting and it didn’t even feature. I asked about it but nobody was interested! The wording is very vague which means anything could happen.
I didn’t speculate on the Budget but did write about “Beware of chancellors bearing gifts” http://www.3caonline.com/2012/03/beware-of-chancellors-bearing-gifts/ on my website. I was right with one of my comments. Time will tell with the other.
Stuart
I agree this one is ambiguous
curiously no revenue is suggested to be raised by it that I can see so maybe it is of limited impact
But the wording on a consultation suggests something much bigger to me
Richard
IR35
Taxation magazine commented on the IR35 paragraphs.There is more in this than (first) meets the eye.
IR35
The ICAEW Tax Faculty think it worthy of comment as well.
Thanks!
I think there is a lot to address here
And my instincts are often right
Not always
Glad you agree
PCG share the view by the way
So does this http://www.contractoruk.com/news/0010482osborne_uses_budget_2012_plot_addition_ir35.html
If as you suggest IT contractors will in future have to have PAYE deducted from payments made to their companies BEFORE those companies get them then this will be a major issue.
The primary problem is that most companies will err on the side of caution and assume the deduction must be made on all payments, without taking a careful look at the situation. Whilst this might be fair for those who really are employees it will be very damaging to genuine small businesses that are selling a service. For years successive UK Governments have acted against these small consultancy businesses and aimed to put them at a disadvantage compared to their larger competitors. This isn’t very surprising when you look at the vested interest some of the MPs have in the large consultancy companies, but this would be a final nail in the coffin.
In the mid-nineties I worked for a software development company that developed and sold software to some major companies in the UK and abroad. The business was developing well and employed around 10-15 people, but did rely upon the shareholders doing consultancy work for the clients they were selling software to. The introduction of IR35 created a great deal of uncertainty and forced the existing owners out of business. The objective was the collect more tax/NICs from these people, but in reality it simply made other people who were paying tax/NICs unemployed.
When you read it a bit more closely it does say “office holders/controlling persons” and I am pretty sure that wouldn’t include an IT Contractor who clearly isn’t either in respect to the business that he is supplying a service to.
Well I think that wrong re the company they work for, almost invariably since they are usually directors i.e. office holders and sole shareholders and so controlling
So I also think you’ve missed by a mile – but time will tell
I think there is some wishful thinking going on here. It is far more likely that they are looking at recent scandals about public office holders who are being paid gross into a company of their choosing rather than having PAYE/NICS deducted at source by the organisation of which they are an office-holder.
Reading it as you are suggesting would mean removing the current self-employment test from IR35 so that anybody with a company must pay tax/NICs in full on everything. Certainly a good reason for any self-employed individual to abandon a Limited Company structure.
And maybe that last is what they want – the tax yield would rise enormously if it were to happen
I have little doubt that removal of the self-employment test would simply result in a further evolution of how IT services are supplied. Software can be supplied as a product from specifications rather than through skilled bums on seats. One could then argue there was no ‘personal service’ in the contract at all and I am sure IT Contractors would push very hard for this. Of course in the long term the products probably wouldn’t come from the UK …
I’m kind of impressed that you managed to apply such a negative-sounding headline (because whenever anyone talks of turning guns on a community, the reader tends to start with the notion that this is a bad thing), and then take a pop at the Chancellor for hs lack of astuteness… when he’s doing something that you seem to entirely approve of!
Headline writing is the art of attracting attention from as many as possible
You’d attact more attention from your audience with a headline that said ‘I agree with Gideon’, surely!
Of course, on a serious note.. you do know, don’t you, that writing headlines which give an entirely misleading indication of the content is the sort of thing that the Daily Mail does.. because they know that lots of people just see the headline, file the misleading statement under ‘fact’ and move on. So a whole bunch of people will read your tweet and think ‘oh, that Tory b@stard is picking on nice small business’ now, boo hiss’… when, actually, he’s having a bit of a go at doing what your readership wants him to do and tackling a bit of tax avoidance.
Still, it’s up to you to decide what passes as ethical on your blog.
Well actually – I think the headline was honest
Osborne is also going to have to make sure that employment legislation is strong enough to ensure that the contractors, having been screwed once by a combination of the employers and IR35, are not screwed all over again.
This can’t just be about tax fairness when employers too often drive people into contracts caught by IR35 without explaining the loss of benefits and assumption of employer’s NI obligations that the average employee knows nothing about.
“I think you’re looking at some weird ‘badges of trade’ there”
Badges of trade relate to whether someone is trading or merely realising capital. They are irrelevant to employment status.
Given that he charges for products not for hours worked, does not enjoy benefits that other staff might, and works for a variety of other clients (what he does outside a particular contract CAN be important, for it suggests a lack of mutuality of obligations if he can work for others) then it is reasonable to assume that he is, on the albeit limited info supplied, indeed self-employed.
I’m really not sure pro bono can be taken into account
That was my point
I’d call that pushing your luck
If I was employed I should not be allowed to work for a Charity during my contractual hours. I regard that as circumstantial evidence that I was not an employee.
The main point is that I do work for them when there is some to do and not when there is not, occasionally work for a variety of third parties, write the occasional academic paper, and (a key point for HMRC) select my own working hours and whether or not I accept a particular contract.
It would still be true that I am self-employed if I never did pro-bono work for a Charity, but that I can do so at 10 am on a weekday is additional evidence.
Maybe you need to update yourself on modern employment contracts
So there are contracts that say “Oh, yeah – if you want to do some work for a charity during office hours, go ahead” are there?
I am not trying to make you look stupid but you are doing it all by yourself.
Yes, there are.
Just as there are zero hours contracts too.
And I have allowed staff top do just what you’re suggesting in my time
So I’m not being stupid at all.
Sorry that should say “it just *didn’t* seem right”
A question, because I’m not too well acquianted with IR35 and all it involves.. do you think this might affect people working under ‘umbrella company’ arrangements? These are popular amongst staffing agencies and, as far as I can see, they’re mainly just a vehicle for everyone to avoid NIC’s.
If it could hit them, effectively demanding that the agencies treat the individuals as employees for tax and NIC purposes then it would have quite a dramatic effect.
I suspect these will be a key target
And if not, the question is why not?
I agree that these schemes should be shut down. If there is a reason why not then, I guess, it’s because most of them are not big earners (albeit that NIC savings are shared with the agencies that ‘engage’ them, who might be very big companies). If the intention is to go after high paid people (which one might infer from the language) then such arrangements might not be a priority.
I’ll watch with interest.
As a permanent employee, who works with many contractors bragging constantly about how little tax they pay, this would be music to my ears. I hear all their wheezes. Claiming mileage for fictitious journeys, buying lunch on behalf of others to claim back the VAT, exotic holidays as ‘fact-finding business ventures’, ’employing’ the wife as company secretary etc. What irritates me most is that even though these people pay little tax they have strong (without exception right-wing) views about how taxpayers’ money should be spent.
Such a familiar story
You see – they are ‘entrepreneurs’
You have ti understand that gives them priveliges
Richard, this blog ha a very misleading title. Your argument is that people who work for one client only over a reasonable period of time are not “small businesses” even if they are operating through a limited company, they are in disguised employment. Having worked with contractors, and even been a contractor myself at times, I would agree with you in many cases. But if that is the case, then strengthening and clarifying IR35 is not an attack on small businesses, is it? On the contrary, if it can be made clearer exactly what does and does not constitute employment, and the rules enforced, it could be regarded as a measure that helps genuine small businesses.
What the small business community is and what some think it is are not the same thing
So I’m guilty of playing to an audience
I will now go and berate myself heartily
Ed: You are now in the spam box
I was trying to make an intelligent non-political comment, but if you persist in suggesting that I am a tax evader in contradiction of the facts that have been available to you for years (and were made available to HMRC when I first registered as self-employed and have been constantly available to them ever since) then you may need to consider the cost of libelling a professional who is more highly qualified than youirself
I made no such suggestion
I questioned the limited and incomplete facts you presented
On the revise information you gave you’re self employed
But you chose to present incomplete data, not me
That is your last comment on this site
Richard,
If you want to know why people refuse to shake your hand, walk out of studios, cancel your interviews and whatever else happened yesterday, you’re going to have to seriously consider modifying the incredible arrogance you demonstrate in exchanges like the one with John.
You can of course delete this message and continue with fingers in ears, or you may want to reconsider your attitude to people who share a different world view to you. This has worked for you up to now but there is increasing evidence in the blogosphere that people are wearing thin of your “style”.
Regards,
Tom
I have a simple attitude to those who take a self centred world view
I say their view is repugnant
And candidly it’s time a great many more people did so
If you don’t like it – tough. I guess that’s because I’d find your views repugnant
But there’s no arrogance in saying that at all
It’s just I side with the majority and the poor
And that profoundly upsets people – who then throw insults and suggest I’m arrogant in defence of their own self conceit
People have said this of me for years – always with the same intent – to seek to shut me up so they can continue their abuse
I’ll ignore you as I did them – precisely because I know your motive and what you seek
The astonishing campaigning and technical succes of the Tax Justice movement shows how right I was to ignore all say nay-sayers as you all along
As for John – he gave a tiny proportion of the facts on which i commented quite reasonably – he got very angry and told me I was wrong and then disclosed what he knew that I didn’t that might make me wrong. And you say I was arrogant? Come on – please pull the other one. But please don’t bother to reply – I’ll spam it, as I have already advised I will on the blog, now