IR35 - Back to first principles....

[breaktwister]

End clients determining SDorC

I am a little confused as to how the end client could possibly make a written determination about my personal status and SDC. As an individual, I have absolutely no legal relationship with the end-client. Only a business to business contract exists so if HMRC was to ask the end-client anything about me as an individual the correct legal position would be for them to refuse to respond and direct HMRC to my ltd for answers.

[WordIsBond]

IR35 was poorly written, difficult to police and easy to circumvent. Everything I have read so far on the new issues can be circumvented by contractors buddying up and forming a ltd with 2 directors proving business services to 2 or more clients. Thus, such a company falls outside the definition of "an employment intermediary" and SDC, IR35 etc doesn't apply.

That's great news! We're all rescued! Funny that none of the accountants, lawyers, or other experts noticed this, and that HMRC hasn't caught on and modified the rules to catch it.

Or, maybe this solves nothing....

[WordIsBond]

I am a little confused as to how the end client could possibly make a written determination about my personal status and SDC. As an individual, I have absolutely no legal relationship with the end-client. Only a business to business contract exists so if HMRC was to ask the end-client anything about me as an individual the correct legal position would be for them to refuse to respond and direct HMRC to my ltd for answers.

I do not recommend that you risk your financial future on the hopes that your end clients will adopt the position you've outlined here. Unless your end clients are outside the UK, they will answer any questions the tax man asks about the working arrangements you had with them. Even foreign clients might if they are somehow convinced by the tax man that they are being helpful.

[jamesbrown]

I am a little confused as to how the end client could possibly make a written determination about my personal status and SDC. As an individual, I have absolutely no legal relationship with the end-client. Only a business to business contract exists so if HMRC was to ask the end-client anything about me as an individual the correct legal position would be for them to refuse to respond and direct HMRC to my ltd for answers.

As you said, you're a little confused. A UK-based end-client is obliged to talk to HMRC. In principle, an overseas end-client can be obliged to talk to their local tax inspector (and thus HMRC) through the ordinary bilateral channels. In any case, the failure of HMRC to glean information from the end-client doesn't necessarily prevent them from building a case, although it does make things more difficult. You're also confused about the application of IR35; this doesn't simply apply to PSCs. The whole point of IR35 is to construct a hypothetical contract between an individual and the end-client (casting aside any intermediaries) in order to establish whether the indicia of employment are present.

[IR35 Avoider]

IR35 was poorly written, difficult to police and easy to circumvent. Everything I have read so far on the new issues can be circumvented by contractors buddying up and forming a ltd with 2 directors proving business services to 2 or more clients. Thus, such a company falls outside the definition of "an employment intermediary" and SDC, IR35 etc doesn't apply.

Creating a non-caught intermediary is possible, you need two modifications:-

1. It needs to be at least 20 contractors, none can own more than 5%.
2. There cannot be a provable direct correlation between what each contractor brings in and what they take out.

This was tried when IR35 was introduced, a vehicle was created by an accountant and vetted by lawyers. It failed to take off, attracting an insignificant number of contractors before it was abandoned in favour of a supposedly better idea several months later. I suspect point 2 in particular was a bit of a deal-breaker for most contractors. However if IR35 mk2 results in everyone being caught, and IPSE were to create/endorse a "large consultancy" vehicle that all contractors could join, maybe there would now be enough incentive and trust for this to work the second time around.

I think a new "large consultancy" vehicle can remain IR35-proof, no matter what tests are introduced in future. If large consultancies remain exempt then a contractor consultancy can be made to resemble them sufficiently in order to share that exemption. The difficulty is not designing the contractor vehicle, it's persuading a viable number of contractors to believe in it as the way forward.

[expat]

I am a little confused as to how the end client could possibly make a written determination about my personal status and SDC. As an individual, I have absolutely no legal relationship with the end-client. Only a business to business contract exists so if HMRC was to ask the end-client anything about me as an individual the correct legal position would be for them to refuse to respond and direct HMRC to my ltd for answers.

It's actually quite simple: they can not correctly determine it; but they can be asked, if asked they will have to answer, they will answer, and right or wrong what they say will stand.

No they can't, and yes they will. Which reminds me to download some Kafka to my Kindle.

[supersteamer]

Personally (and I appreciate I'm in a small minority) I like the idea of a FLC - we're not employees and we're not big corporates either. A simple clear tax structure is worth something in terms of money, administrative burden and peace of mind. I just don't like the IPSE FLC as it doesn't seem to solve many of the problems and is still too woolly with regard to definitions.

Anything that involves defining "Part & Parcel", "Supervision", "Control" etc. is an immediate fail in my book (regardless if I determine it or my client) as it is too subjective to enforce properly and results in an unequal playing field between people quoting rates on different interpretations of taxes due.

Anyway, here's my proposal for a FLC which is JUST TICK BOX ACCOUNTING - no philosophical navel gazing about the distinction between employees and service providers:
First, up, make HMRC happy: all Income is treated as PAYE (!)

BUT - TO ALLOW FOR THE FACT WE ARE NOT EMPLOYEES THE FOLLOWING ADJUSTMENTS ARE ALLOWED:

1. Because our income is highly variable and some years may be very lean, any unused personal tax allowance may be carried back and a rebate claimed on higher rate taxes paid in previous 5 years. This will allow us to even out the good times with the bad without having to keep a war chest in the company coffers.

2. If HMRC want to tax us PAYE - fine, but that shouldn't mean having their cake and eating it: no more employers NI (PAYE is an employment tax!).

3. Expenses of running a business should be allowable as we will still have statutory requirements and contractual obligations that nobody else will pay for: accountants, insurance, IT equipment, telecoms etc. (many of which disallowed for no apparent reason under IR35)

4. T&S must remain allowable: we could say the first £x of travel expenses are not claimable where £x is the average permie commute cost. Expenses beyond this for those servicing distant clients seem entirely reasonable.

The above can't really be abused by "disguised employees" as they (1) won't have tax allowance to carry back as they are in continuous employment, (2) the allowed expenses are for boring things like accountants and insurance that nobody would want to buy unless they actually need them, and (3) the level of T&S they claim will typically be below the threshold where it's claimable.

A 1-person LTD would still be allowable for those intending to build a service based consultancy (as would be no client liability nobody would be forced to use a FLC) but IR35 reviews would be mandatory and the review industry properly regulated. Such companies should have a proper business plan for growth and would be downgraded to an FLC if they failed to expand to the point where they employ additional fee-earning staff after 4 years of operation.

[malvolio]

Firstly, before defining the workings of an FLC, perhaps we should see if the whole idea is viable and acceptable to HMG? Then we can argue the operational detail.

Secondly we need to be very careful about what tax concessions we would then ask for, since HMG's whole concern is to maximise tax recovery by HMRC. Aiming to retain the current net tax position is probably not the best approach (appealing as it is, of course!)

Thirdly, if the FLC concept is approved then surely the next step is to define precisely who can use one and under what circumstances so only genuine candidates need apply. Then we move on to how it works.

And finally, why split personal and FLC taxation if the whole point of the FLC is that it is a one man vehicle? Why not a single tax on the FLC's gross earnings, then allow the owner to withdraw money for living and working for free and let them work out how much they can save in the company for the bad times?

Just a thought...

[LisaContractorUmbrella]

Tried this - everything seems to come back dated 1/2/2001. Not convinced the results are accurate...

Don't know if this will be any help http://www.law.ox.ac.uk/themes/tax/d...oc08-12-02.pdf article written in 2001 referring to the original IR35 proposals

[WordIsBond]

Firstly, before defining the workings of an FLC, perhaps we should see if the whole idea is viable and acceptable to HMG? Then we can argue the operational detail.

In principle this isn't bad. But to be clear, even if you think you are in a weak negotiating position, you don't make concessions without expecting concessions in return. The problem I have with IPSE's FLC is it appears to do exactly that -- make concessions without detailing any that HMG should make in return. (We HOPE that HMRC won't target FLCs for IR35, but we aren't insisting.)

If you think your position is weak, you may make larger concessions than you ask for, but you won't make concessions without any in return. That's surrender.