HMRC issued a consultation document on 17 July 2015 to explore options for tightening up IR35*, the intermediary’s legislation that aims to tackle tax avoidance through disguised employment.
Their latest release is now considering the possibility of making the “engager” responsible for deciding whether the engagement is outside IR35.
Is HMRC passing the buck?
HMRC have tried this system for over a decade, have failed time and time again to make it work and now they’ve decided that the way forward is to make someone else responsible for it. Oh and also make them liable for any outstanding employment taxes or National Insurance contributions.
HMRC believes IR35 is not working as effectively as it should be and that non-compliance is widespread.
But why has IR35 failed?
Is it possible that the main reason for its continued failure are the tests they keep referring to; direction, supervision and control? How easy is it to determine these things?
I’ve copied an extract from a nineteen page Government document, that refers the legal judgment of, for example, Ready Mixed Concrete (South East) Ltd V Minister of Pensions and National Insurance [1968] 2QB497 (ESM7030):
“A contract of service exists if these three conditions are fulfilled. (i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master (ii) He agrees, expressly or impliedly that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.(iii) The other provisions of the contract are consistent with its being a contract of service.”
Is that clear? That’s one of the main problems with IR35 - it’s almost impossible to apply.
Also, why level the playing field?
HMRC introduced IR35 to level the playing field between employed workers and being a PSC contractor or self-employed worker - but why? In my opinion, it shouldn’t be a level playing field. PSC contractors don’t choose to be employed and they don’t want the benefits of being employed such as entitlement to holiday pay, pension contributions, redundancy pay, sick pay, extended notice periods etc.
I think that IR35 is based on outdated views, incorrect assumptions and impossible tests from HMRC. Now it appears that HMRC have concluded that they can’t make IR35 work so they’re passing the responsibility to the “engager”.
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*IR35 requires individuals working through an intermediary, a limited or personal service company (PSC), to pay similar tax and NICs as employees, where they would have been an employee if they were providing their services directly to the end-user.
John is Managing Director of First Recruitment Group