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2008 is a significant but largely ignored anniversary for the self-employed. It is exactly twenty years since the Inland Revenue (now HMRC) decided that self-employed contractors should be bought into line with their PAYE colleagues. This started a raft of legislation aimed at contractors, which continues to this day with HMRC’s latest inquiry into umbrella travel expenses . Until 1988, self-employed contractors who worked for an agency, were taxed under Schedule D. They were not deemed to be ‘employees’ of the agency, nor were they paid directly by their clients, so they were able to work as self-employed freelancers with considerable tax and NI advantages as a consequence. The economic boom of the 1980s saw widespread abuse of Schedule D, and so the government decided to introduce legislation which in effect meant that for tax purposes, the presence of an agency made no difference - employment status depended on the relationship between the contractor and the client. The 1988 legislation effectively put an end to agencies making payments without deduction of tax & NI under Schedule D. Over the next twenty years, contractors faced two further major pieces of legislation including IR35 and the recent Managed Services Legislation. However, the professional contracting sector continues to thrive despite two decades of legal onslaught. It is proof, if it were necessary, that tax avoidance is simply not the main motivation of the majority of the self-employed. If that were the case, this constant stream of legislation would have sent the sector into terminal decline. The fact that it is booming is proof that minimisation of tax liabilities is not, in general, particularly high on the list of most contractors’ priorities. Yet this legislation has not been entirely unprovoked. Throughout the 1990s, it remained perfectly legal to work via an agency using a limited company. This proved to be a highly tax efficient arrangement as the profits of the company could be paid out as dividends, thus avoiding both employers and employees Class I NIC’s. Most people agreed that it was a reasonable quid pro quo for taking the risk of ‘self-employment’ and foregoing many state benefits applicable to PAYE. The Treasury, however, was convinced that large numbers of self-employed contractors were, in reality, employed because they worked under supervision of the end-user and did so under a typical ‘master and servant’ arrangement. Thus IR35 was introduced in the March 1999 Budget to remove the opportunities for the avoidance of tax and Class 1 National Insurance Contributions by the use of intermediaries such as service companies or partnerships. IR35 was a major blow for contractors who had become ‘self-employed’ on the understanding that the tax advantages would compensate for the loss of security and state benefits. As a response to IR35, which resulted in a tightening up of the use of limited companies for agency work, there was an explosion of ‘providers’ offering tax efficient solutions via various types of management service, umbrella and composite companies. Unfortunately while most were legitimate, a number of cowboys stalked the contracting prairies and the Treasury moved back into legislative mode and effectively banned the use of Managed Service Companies in 2007, forcing all those caught by these new regulations to operate under PAYE. Despite these major pieces of legislation since 1988, HMRC still believes that problems remain within the contracting sector and HMRC and is now focusing its attention on umbrella companies and travel expenses with the recent launch of a consultation document, which seeks to expand and test the government’s analysis of those structures using overarching employment contracts –umbrella companies and employment agencies. While HMRC is only doing what it has to do, successive governments might have benefited from a more positive approach to the self-employed, particularly during the current squeeze on PAYE jobs. Twenty years of virtually continuous legislation has left contractors and agencies in a confused state of mind. While it is indisputable that a minority of service providers and contractors have bought some of these problems on their own shoulders, it does seem a pity that UK governments in general distrust self-employed contractors, which is odd when their stated objective is to encourage enterprise and the small business sector. Let’s hope that the next twenty years will contain a lot less legislation that affects contractors and agencies and that the sector itself keeps its house firmly in order. Article written and provided by Barry Roback, chief executive of JSA , an accountancy firm specialising in contractors. Sep 3, 2008 Email this article Printer friendly page Previous Page
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