IR35 loses appeal case

[VectraMan]

I think you are probably meaning to imply that ThePuma must be wrong, however I've know for many years that a salary tax bill cannot necessarily be passed to an employee (even though it's his tax bill on his income) so I think ThePuma is right, and I do genuinely want to know whether making sure there are no funds in the company is a potential defense strategy.

Obviously I hope he is right. However I find it hard to believe that we've got this far without either HMRC, or PCG or lawyers acting on behalf of the contractors spotting such an obvious flaw. Also I find it hard to believe that having proven that the Ltd. company doesn't exist for tax purposes, HMRC would give up faced with a contractor hiding behind limited company liability, and wouldn't be able to convince a judge of the individual's liability.

And what works for an employee and even with an MSC doesn't necessarily work with a director. I think what IR35 Avoider says is probably exactly right: an employee can't claim not to have knowledge of the employer not paying tax and NI when the employee is a director.

[THEPUMA]

This extract to me is unclear due to the lack of "ands" or "ors" between the conditions. I believe they should be ands in which case you are OK because the employee didn't know it ought to be deducting tax or NI because it didn't know it was caught by IR35.

I am pretty sure this is correct because the first condition in isolation sounds intuitively far too harsh to me.

Although I agreed with you when you posted this, I did vaguely remember there was another condition under which they could pursue the employee, if the employer had made an error in good faith. I found the following language on the web.



I think this does mean the limited company contractors could be pursued personally. The difference from the MSC case is that MSC's were run by accountants and HMRC would have made a fool of itself if it tried to argue that accountants made IR35 assessment errors in good faith. A contractor would have to insist the error was in good faith (so that he wasn't seen as colluding with himself in his role as employee) and thus be forced to impale himself on the alternative condition.

http://www.generalcommissioners.gov....fing_notes.htm

[Lewis]

The difference from the MSC case is that MSC's were run by accountants and HMRC would have made a fool of itself if it tried to argue that accountants made IR35 assessment errors in good faith. A contractor would have to insist the error was in good faith (so that he wasn't seen as colluding with himself in his role as employee) and thus be forced to impale himself on the alternative condition.

And what about the situation where your IR35 assesment was made by a professional IR35 specialist (e.g. QDOS).

[Lewis]

I believe they should be ands

Surely they can't be "and" because the first two are mutually exclusive. The employer made either a honest error or a deliberate avoidance not both.

[IR35 Avoider]

Obviously I hope he is right. However I find it hard to believe that we've got this far without either HMRC, or PCG or lawyers acting on behalf of the contractors spotting such an obvious flaw. Also I find it hard to believe that having proven that the Ltd. company doesn't exist for tax purposes, HMRC would give up faced with a contractor hiding behind limited company liability, and wouldn't be able to convince a judge of the individual's liability.

And what works for an employee and even with an MSC doesn't necessarily work with a director. I think what IR35 Avoider says is probably exactly right: an employee can't claim not to have knowledge of the employer not paying tax and NI when the employee is a director.

Just to clarify, in case you've missed my more recent posts, I've changed my mind and I now don't think there is a loophole. I think HMRC would say that a wrong IR35 decision leading to PAYE not beind deducted was an error made in good faith by the employer, and consequently they can pass the bill to the employee.

[IR35 Avoider]

And what about the situation where your IR35 assesment was made by a professional IR35 specialist (e.g. QDOS).

That would be an error in good faith. (In that scenario HMRC would have to admit that IR35 is so complicated even accountants get it wrong. In the MSC case there is a clear conflict of interest for the accountants which can be used to cast doubt on whether decisions were made in good faith. It's also difficult to accuse the contractors of colluding because they are merely employees not directors and therefore cannot be presumed to understand IR35 and PAYE.)

[THEPUMA]

Surely they can't be "and" because the first two are mutually exclusive. The employer made either a honest error or a deliberate avoidance not both.

Sorry yes you're right. I'll investigate and come back to you.

[THEPUMA]

I've investigated further as promised and it would appear that the reason this is ineffective is that the first bullet point only applies to tax, which is not normally the focus of an IR35 case (although may be relevant to a lesser extent than NICs).

The third bullet point is the only one that applies to NICs, and that says that the employee must have known about the wilful failure to deduct, so wouldn't apply.

Plus, an application for transfer of PAYE debt where there has been an error in good faith is made by the employer to HMRC, so it is not going to be an issue in an IR35 case. Also, the liability that can be transferred is the amount that ought to have been deducted from payments made to the employee – there are no actual deductions in an IR35 case, and HMRC has the same problem with the second category below.

With regard to NICs, Regulation 86 Social Security (Contributions) Regulations 2001 allows for the transfer of primary contributions only in circumstances where:

the failure to pay was due to an act or default of the earner and not to any negligence on the part of the secondary contributor; or
it is shown to the satisfaction of an officer of the Board that the earner knows that the secondary contributor has wilfully failed to pay the primary contribution and has not recovered that primary contribution from the earner.

Neither circumstance seems likely to apply in an IR35 case.

(I should give appropriate credit to Accountax for the information above).

[Lewis]

I've investigated further as promised and it would appear that the reason this is ineffective is that the first bullet point only applies to tax, which is not normally the focus of an IR35 case (although may be relevant to a lesser extent than NICs).

The third bullet point is the only one that applies to NICs, and that says that the employee must have known about the wilful failure to deduct, so wouldn't apply.

Plus, an application for transfer of PAYE debt where there has been an error in good faith is made by the employer to HMRC, so it is not going to be an issue in an IR35 case. Also, the liability that can be transferred is the amount that ought to have been deducted from payments made to the employee – there are no actual deductions in an IR35 case, and HMRC has the same problem with the second category below.

With regard to NICs, Regulation 86 Social Security (Contributions) Regulations 2001 allows for the transfer of primary contributions only in circumstances where:

the failure to pay was due to an act or default of the earner and not to any negligence on the part of the secondary contributor; or
it is shown to the satisfaction of an officer of the Board that the earner knows that the secondary contributor has wilfully failed to pay the primary contribution and has not recovered that primary contribution from the earner.

Neither circumstance seems likely to apply in an IR35 case.

(I should give appropriate credit to Accountax for the information above).

Good work.