I thought you may be interested in this story I found on MSN regarding IR35: Budget to close tax loophole which disguises employees as freelancers:  http://bit.ly/1RZho2f

Unfortunately, I was unable to contact Sam Lister ahead of posting this blog.  I will continue to try and get in touch with Sam at the Press Association so that I can update this blog as necessary, but my initial comments follow:

“Sources” can be saucy, especially pre-budget!

1. 90% of earners do not comply?  Is there real evidence of this?  On what basis?  As a former Inspector of Taxes and now a Chartered Accountant, I can truly say in my opinion HMRC do not (for perhaps understandable reasons) empathise with small business.

2. Depending upon the wording of this new legislation, it seems likely that state-backed organisations will be naturally risk averse and so deduct tax at source.  Sounds good?  Except then the individual earner will be having to pay taxes out of post-tax income.  How will this affect the economics related to (say) an independent worker who is expected to travel from job to job (at their own expense) whilst not being paid in the interval between jobs?

3. Will the “deemed employee” automatically get the same rights to employment protection/pension etc?  if not, how is this fairer?  If they do, will it cost more?  If not, how is the new arrangement “fairer”?

4.  The distinction between “Employed” and “Self-Employed” is complex.  It is not a clear line.  It never has been simple as case law has shown over many years.  The Chancellor may try to define it on one sheet of paper – but I fear he will fail, and/or create a mindless tick box bureaucracy which restricts business innovation.  Does a Government really wish to discriminate against independent small business?  They are not all “rich BBC Fat cats”!

5.  Why should there be different rules for “state” organisations vis a vis the private sector?  Should there not be a single law for all?

6.  Paying the “right” amount of tax under the law is surely correct.  The rules and rates though are a matter of policy and should be subject of thought and debate.

Example; An independent computer programmer with a project to help develop systems for a large corporation earning say £60,000 a year will face a marginal tax rate of 42% (income tax plus NIC).  The large corporation on the other hand would face a tax rate of 20% whether it earned £60,000, £60m or £600m.  The tax rate for the large corporation is down from 30% less than 10 years ago.  Fairness and where best to invest scarce HMRC resources are questions which may be coloured in the eye of the beholder.

The proposed rules seem to be designed to hinder certain small businesses from operating as limited companies.  Is it good policy to hamper independent commercial choice?

7.  If the independent earners did operate as a limited company, the earners would still have to pay extra tax to extract any money for their own use.  If they are genuinely independent, what is the “abuse”?

8.  If there is a genuine lack of compliance with existing rules, would it not be more efficient to employ more HMRC staff to police them, rather than adding another set of bureaucratic and complex rules?

A properly informed debate would be useful.  Anyone wishing to contribute to this debate, please leave a comment below.

IR35 TestsFollowing a review of the effectiveness of the IR35 rules, there is to be new guidance from HMRC including what is described as 12 business entity tests.

Points are allocated to each test and if a contractor scores less than 10 points there is a high chance of them being caught by IR35; if they score more than 20 points there is low risk.

 The headings for the tests are set out below:-

  • Business Premises Test
  • PII Test
  • Efficiency Test
  • Assistance Test
  • Advertising Test
  • Previous PAYE Test
  • Business Plan Test
  • Repair at Own Expense Test
  • Client Risk Test
  • Billing Test
  • Right of substitution test
  • Actual substitution Test

 For further advice regarding IR35 contact Eaves & Co on 0113 2443502

HMRC assessed Elaine Richardson who worked via ECR Consulting Ltd for £50,000 under IR35.

The case went to tribunal where three tests were applied; mutuality of obligation, substitution and control to determine the nature of her working relationship.

In deliberating, the tribunal made the following observations about ECR:

  • It operated from a dedicated business area at her home
  • It has company a domain and website
  • It advertises its services and is a member of the Professional Contractors Group
  • There are retained reserves and invested in business development
  • Over the years ECR has taken on fixed price work for a variety of clients.

The tribunal judges concluded, “it is clear to us that ECR is a genuine business and therefore not a target of the IR35 legislation”.

From this case it is clear that IR35 is still being pursued by HMRC, and freelance arrangements must have a clear commercial trading rationale behind them.

If you have any queries about how IR35 applies to you or are thinking about going freelance, please get in touch on Leeds (0113 2443502).