Roger Sinclair (Egos) on New HMRC IR35 guidance

[LisaContractorUmbrella]

It looks like Roger Sinclair has come to the conclusion that there's no point trying to prepare for a possible breach of IR35 when HMRC are unlikely to investigate in the first place.

You only have to look at the report by the Office of Tax Simplification in March 2011entitled Small Business Review to gain the distinct impression that the intention is to find a way to lift the IR35 burden rather than increase it.

The report states inter alia under the section headed Major structural Changes, "Our remit requires the OTS to address the complexities that exist within the IR35 legislation. As indicated above, the structural change of integrating income tax and NICs would take away the need for IR35 but we recommend two options that the Government should consider adopting until the structural changes are introduced:
• Suspend IR35 with the intention of permanent abolition, using the period of suspension to investigate behaviours and costs; or
• Keep IR35 legislation unchanged, but improve the way it is administered by HMRC.
Our third alternative is to consider the introduction of a new “business test”. Although this option is not an immediate simplification (and would require more definitions and tests) it would aim to reduce radically the size of the population potentially caught by the IR35 legislation and thereby remove a large number of contractors from the worry of a potential IR35 enquiry".

If the OTS document is the source of HMRC's Guidelines it is a convincing pointer to the direction in which things are headed and may explain Kate's apparent ambivalence.

HMRC, it has to be remembered are charged with the task of collecting targeted levels of tax income. It is bound to be made more difficult if increasing numbers of Contractors/Freelancers claim expense offsets against their weekly income compared with the practice of incorporated entities who are restricted to one annual offset against corporation tax. And that's beside scores of millions mounting up in VAT arrears as Businesses extend their payment deadlines rather than face Creditor court orders in these chastened trading conditions.

How did you come to the conclusion, through that article, that HMRC are unlikely to investigate?

[JamJarST]

In Lime IT the contractor used her own office from time to time. There's no doubt this is a big plus point even if you do get investigated. I would imagine that it would put them off. That's why it carries 10 points.

I would have thought when you are negotiating with the client doing bits and pieces in your own office for the project should be something to put into your contract. Once you have that you're pretty impregnable.

The thing is that at the moment my office is in my home.

[BlasterBates]

The thing is that at the moment my office is in my home.

Well it's up to you and I can't judge how independent you work at the client site, but having read a few case studies, to me falling inside IR35 can happen very easily so moving the office out to a premises is a good way of significantly increasing your "outside IR35" profile, particularly if you can build it into the contract and was an important point in at least one important case. If I recall correctly the contractor in Lime IT had business premises, which seemed to impress the Commissioner. It depends on how serious HMRC are about ramping up their enquiries.

[JamJarST]

Well it's up to you and I can't judge how independent you work at the client site, but having read a few case studies, to me falling inside IR35 can happen very easily so moving the office out to a premises is a good way of significantly increasing your "outside IR35" profile, particularly if you can build it into the contract and was an important point in at least one important case. If I recall correctly the contractor in Lime IT had business premises, which seemed to impress the Commissioner. It depends on how serious HMRC are about ramping up their enquiries.

I have been toying with the idea of virtual offices for a while purely because it keeps me away from the telly and gives me a location to have offices. Wonder if they count as premises for HMRC?

[Contreras]

Hardly a revelation, that's rather the point, isn't it? Identify who not to chase for IR35?

Exactly. At least that was the original expectation.

The problem is that the way the tests are currently scored,

It seems to me the problem is that there is a scoring system at all. I am very concerned that this whole exercise is a way for HMRC to increase the overhead expenses, and therefore effectiveness, of running a "personal service company".

I think over time we can expect some of the tests to be tweaked, other tests to be added, but I doubt that any will be removed as HMRC will find it far more effective to leave the nonsense criteria in place and adjust the scoring system instead.

For example we could see the criteria for advertising budget relaxed to something more realistic - then it becomes the norm for contractors to splash out on unnecessary expenses, HMRC will decide that it's mostly a scam but prefer to reduce the points awarded instead of removing the test.

Thus we arrive at a point where in effect it becomes mandatory for your average contractor to have umpteen business insurances and god knows what other expenses just to peg level in the scoring system with genuine IR35 targets.

In theory adding new tests should broaden the scope and therefore increase the number of businesses insulated from IR35, but instead due to the HMRC's weighting of each test the problem is compounded.

Now consider perhaps if HMRC had offered a list of questions/scenarios, any single one of which would afford the contractor an outright IR35 "pass". It is clear from the published weighting that HMRC already accept some of the criteria as "slam dunk" passes so this is a workable solution, and the list can be extended over time to cover ever more scenarios without adding any expense or administration to the contracting community as a whole.

This is why I believe it is the mere existence of a scoring system (not HMRC's specific implementation) which is at fault. Remove the scoring system and HMRC can have as many 'business' criteria as they like, the tests will always work in the contractor's favour. The scope would initially be narrow of course, only a few contractors would benefit, and certainly not the IR35 victory some were hoping for! But equally we would not be seeing exclamations of "WTF?!, HMRC says I'm not a real business unless blah...".

So you have to spend around £1000 a month plus business rates to have something you don't need to do your job?

Well perhaps not quite that much but yep, you got it.

[TheFaQQer]

I'd rather pay Qdos £400 a year in insurance to defend my IR35 status and pay any fines that are due if they lose, than pay £200 a month for a desk somewhere which I'd hardly use (if ever) and which might still leave me open to paying fines if I lose.

Also, if you are only taking out the office to become lower risk, isn't there a chance that HMRC might see that as aggressive avoidance and hit you anyway?

[BlasterBates]

I'd rather pay Qdos £400 a year in insurance to defend my IR35 status and pay any fines that are due if they lose, than pay £200 a month for a desk somewhere which I'd hardly use (if ever) and which might still leave me open to paying fines if I lose.

Also, if you are only taking out the office to become lower risk, isn't there a chance that HMRC might see that as aggressive avoidance and hit you anyway?

Well one thing to bear in mind is that if your working practices don't reflect the contract, which is sometimes the case, then at least check that your insurance isn't invalidated. As long as you are sure you're outside IR35. The thing is an office is a simple thing to instigate and as long as you visit ocasionally, i.e. choose somewhere locally it is a big plus point.

[northernladyuk]

Well one thing to bear in mind is that if your working practices don't reflect the contract, which is sometimes the case, then at least check that your insurance isn't invalidated. As long as you are sure you're outside IR35. The thing is an office is a simple thing to instigate and as long as you visit ocasionally, i.e. choose somewhere locally it is a big plus point.

If you have your own business premises, which gives you 10 points, it strikes me that it would be fairly easy to get the 20 points necessary. A clause in the contract expecting you to do rework and some other minor points would easily see you over the 20 plus mark.

That would mean a simple submission of paperwork would put you in the clear. I wonder how much a rented office space would cost.

We need a CUK office that we can rent micro desks from. Admin can be tea lady.

[Precept]

How did you come to the conclusion, through that article, that HMRC are unlikely to investigate?

I took my cue from Hex's quote (from Roger Sinclair's article) as a prelude to examining the OTS agenda behind the Small Business Review enquiry and report.
I regret conveying the impression that I expected no IR35 investigations at all, that was not the theme that I was on.

Although the OTS had a wider remit, it dwelt at some length on the complexities and affects of administering IR35. However, in mentioning the possibility of abolishing IR35 it implied a negative viewpoint as to its worthiness in future taxation arrangements. This is an interesting insight and suggests that the whole issue of tax policy for SME’s may undergo profound changes and have far reaching consequences for the administration of these entities and their legal format.

More will be revealed in time from the Working Party, but who is to say that the current point scoring rigmarole is merely a temporary arrangement.

[GeekyGrandad]

Naive

If you have your own business premises, which gives you 10 points, it strikes me that it would be fairly easy to get the 20 points necessary. A clause in the contract expecting you to do rework and some other minor points would easily see you over the 20 plus mark.

That would mean a simple submission of paperwork would put you in the clear. I wonder how much a rented office space would cost.

OK, if you havew your own office space and have had it for a while AND you do all your work from it AND your business expenses DON'T show that you really have a bum-on-seat contract elsewhere THEN you are likely to be able to hold onto the points.

On the other hand ..... HMRC are liable to see this as a sham and not take too kindly to it.

Your call.