The absurdity that is IR35
In February this year, reports of government departments paying high-profile people through personal service companies were everywhere, writes Chris Leslie, formerly in charge of tax investigations at HMRC and the founder of specialist advisory Tax Networks Ltd.
The Treasury has since investigated how many other people who work for government departments were employing similar techniques to lower their tax bills.
HMRC’s ethical rhetoric about disguised employment is apparently hypocritical and now being exposed.
Probably due to political pressure, HMRC IR35 enquiries have now been sent out. It is sensibly assumed that this new campaign is not restricted to high-profile people.
IR35 is about assessing the employment status characteristics of hypothetical contractual arrangements between the worker and end-client by striking out the personal service company acting as the contracted intermediary.
Those challenged by the latest batch of IR35 enquiries will recall one-time ‘face’ of the Revenue Moira Stuart’s 2008 slogan that “tax doesn’t have to be taxing”. Nothing is further from the truth. Ironically, Moira Stuart was reported in February 2012 as being paid by HMRC through a personal service company arrangement.
However, when considering a recent Upper Tribunal decision whereby ITV’s NICs appeal was quashed because entertainers where deemed as employees, tax is taxing.
So why does the tax and NICs treatment differ? The simple answer is revealed in the history of NICs regulations.
Generally, where Class 1 NICs are paid, the employee who has paid those contributions may be entitled to a wider range of state welfare benefits, such as Jobseekers Allowance, which are not available to self-employed people paying other classes of NICs (- a fact that much of the anti-limited company press coverage seems to omit).
Most performers/artistes in the entertainment sector are engaged under contracts for services and would generally be assessable to tax as self-employed (under Schedule D). However, it was acknowledged that to follow this line for NIC purposes would mean that the majority of entertainers who had previously paid Class 1 NICs would only be liable for Class 2 and Class 4 NICs, which would not entitle them to welfare benefits.
The NICs treatment of individuals who are entertainers is different from that which applies for tax. This is amplified in the case of ITV Services Ltd v HMRC (FTC/12/2011 ); the Upper Tribunal decision was released February 7th 2012. This was just at the time of the breaking news about Moira Stuart.
In essence the payments by ITV to actors were computed in various ways under various types of contract were deemed as “salary” as defined in the NICs legislation.
HMRC had determined that certain entertainers engaged by ITV should have been treated as being in employed earner’s employment for NICs purposes, and that ITV is to be treated as liable to pay secondary Class 1 NICs in respect of the payments it makes to those entertainers.
The NICs “Categories of earners” legislation deems many different ‘classifications’ that may otherwise be self-employed for tax purposes. When considering the characterisation of payments, from the outset of the contract, ITV entertainers were considered to be caught by this NICs legislation.
Now what if they had had their own personal service companies, and the arrangements were not caught by IR35? It’s difficult to provide a straightforward answer other than to conclude that the legislation appears to be contradictory and absurd.
Similarly, and in the Stuart case, if Moira was personally engaged by ITV they would have to pay employment NICs. Though when engaged by HMRC though her personal service company, HMRC doesn’t have to pay employment NICs. So what if Moira got an IR35 enquiry, what would HMRC do; argue that she was not self-employed?!