an IR35 example for discussion

[breaktwister]

I have been trying to think of some examples that would show just how badly this could work out in the real world. Please let me know what your thoughts are regarding the below, if I have misunderstood anything etc. My intention is to send some examples to my MP and FSB and other bodies as I am amazed that the FB 2017 consultation shows that there will be no "negative macro-economic impact as a result".


Joe owns a business that employs a number of staff to provide knowledge based project services to business clients across the UK. This involves, for some projects, Joe’s employees working at the client site. Joe’s employees are paid via his company payroll. IR35 cannot apply to the employees as they do not own any material interest (5%) in Joe’s company which is receiving payment for the services. Expenses incurred for T&S when Joe sends his employees away are legitimate business expenses and are offset against tax.

Joe's company often receives calls from a recruitment agent who they have had dealings with for many many years. The agency has, from time to time, PS clients seeking expertise in Joe's niche area. Joe takes a call in relation to an opportunity with a PS client. He learns that the work will involve a mixture of consultancy and delivery, advising the client but then taking the client's instructions as to which elements to implement. The work is small enough to be performed by one resource over a 6 month period primarily at the client’s site, which is at the other end of the country. All Joe’s employees are busy so he decides to perform the services himself rather than turn down the business from a new client. Under current HMRC guidance the end-client will review the "working practices only", and determines "the role" to be “inside IR35”. They notify the agency who is forced to treat Joe as a "deemed employee" and requests his NI number so that the payment due to his company can be taxed as if it were a payment to him personally. Joe will incur significant T&S expenses to perform the contract but none are to be allowed before the payment is taxed. Joe disagrees with the clients view and refuses to provide his NI information leading to the relationship breaking down between him, the agent and the end-client with no economic activity taking place.

[breaktwister]

Is it important that Joe has a number of employees at his company? If it is important evidence as to whether Joe is "in business" or not then why does it not form part of HMRC guidance or the new ESS tool?

Up until this year Joe would rightly decide that he is outside IR35 for all engagements as he is clearly in business on his own account, providing specific project services. But HMRC new guidance and tool have a flawed focus only on working practices which will produce many similar incorrect “inside IR35” determinations.

This will destroy the UKs flexible economy particularly as T&S is disallowed.

"Just find work near your own home".

EDIT: "And make sure its on a payroll as we don't want ANY small business owners paying themselves in dividends"

[RonBW]

You missed the final step - the client and agency look for someone else who is prepared to accept the contract under those conditions.

The client is offering a contract under certain conditions, rightly or wrongly. The company can accept that or not.

[RonBW]

But HMRC new guidance and tool have a flawed focus only on working practices will produce many similar incorrect “inside IR35” determinations.

How is determination based on reality a flawed focus?

[LondonManc]

How is determination based on reality a flawed focus?

I think breaktwister is looking at this as a restraint of trade; that said, Joe should really negotiate expenses into his deal otherwise it's not too good to turn down.

[breaktwister]

Joe should really negotiate expenses into his deal

I had this exact conversation today with an agency trying to fill a PS role. I simply cannot pay T&S out of my own post-tax pocket, especially if I am moving onto payroll and taking that hit also.

End-clients however, will simply not be accustomed to the idea that they could pick up my expenses as a business expense for them. Not sure how this will go down in the market-place.

[breaktwister]

How is determination based on reality a flawed focus?

The reality is that it is not only "working practices" that determines IR35 status. Read my example again and you might understand why.

[LondonManc]

I had this exact conversation today with an agency trying to fill a PS role. I simply cannot pay T&S out of my own post-tax pocket, especially if I am moving onto payroll and taking that hit also.

End-clients however, will simply not be accustomed to the idea that they could pick up my expenses as a business expense for them. Not sure how this will go down in the market-place.

Will they pick up your sick pay, holiday pay and other expenses too?

If they perhaps understand that you're being taxed like staff, there may be a bit more sympathy. Ask them if they'd move house for a six month job.

[Patrick@Intouch]

Status under IR35 has always been determined firstly by reference to the upper contract. This is the imagined contract between the individual and the end client and considers the interactions between the two and how they reflect against the irreducible minimum of Personal Service, Control and Mutuality of Obligations.

The written contracts are then used in support of this but working practices always take precedence.

The curtailing of the ability to claim T&S for those inside IR35 was introduced in April 2016 so nothing new there then.

The main differences really are that someone other than the individual involved will be deciding their status, that PAYE and NIC will be applied to turnover before any remuneration is made to the company where that status is deemed within the new rules and that agencies are likely to pass down the burden of employers NIC's to the end contractor.

There has been talk of PS clients negotiating higher day rates to compensate contractors for this.

[breaktwister]

I think breaktwister is looking at this as a restraint of trade.

Also, I know that we are leaving the EU but under current law there is a protection under ECHR A1P1 for property, including owning a business. The fact that the legislation here allows the Courts/HMRC to "ignore" the legal entities of your business and the contracts it has entered into could be argued to be an illegal deprivation of the ownership of the property.

The point should be argued in Court which is why I want to send some examples to some of these bodies that should be funding a fight against this nonsense.