an IR35 example for discussion

[northernladuk]

I have been trying to think of some examples that would show just how badly this could work out in the real world. Please let me know what your thoughts are regarding the below, if I have misunderstood anything etc. My intention is to send some examples to my MP and FSB and other bodies as I am amazed that the FB 2017 consultation shows that there will be no "negative macro-economic impact as a result".

I don't want to be rude but can't you get someone else to do the examples for you? I know you are trying hard but every thread seems to end up the same. I can't help 'making stuff up' is really not the way to go and unless you fully understand it and are 100% confident in your examples you could be causing more problems than you cure. I have no problems you coming on here, thrashing around and learning it a bit each time... but this leading to professional representation to MP's etc?? Please, and sorry, I do mean it... please don't. Let the professionals do it.
That petition was a perfect example of someone trying and missing by a million miles and in fact causing more problems than solving.

Joe owns a business that employs a number of staff to provide knowledge based project services to business clients across the UK. This involves, for some projects, Joe’s employees working at the client site. Joe’s employees are paid via his company payroll. IR35 cannot apply to the employees as they do not own any material interest (5%) in Joe’s company which is receiving payment for the services. Expenses incurred for T&S when Joe sends his employees away are legitimate business expenses and are offset against tax.

Ha haaa! I was right!! Why are you quoting this though. IR35 cannot apply because they are employees. Period. Why overly complicate by farting a term you read somewhere else? You've already complicated the argument by making Joes company out to be something most people don't understand. Again with the expenses. Permie expenses are nothing to do with the argument so why are you talking about them.

IMO the basis of your argument is, maybe not fundamentally flawed, just far too complicated to provide any meaningful argument later. He heads up a consultancy staffed by employees. That's it.

Joe's company often receives calls from a recruitment agent who they have had dealings with for many many years. The agency has, from time to time, PS clients seeking expertise in Joe's niche area. Joe takes a call in relation to an opportunity with a PS client.

So your made up example has entered a situation that is pretty uncommon and in many PS clients simply will not work. By guessing at situations you are forgetting the engagement processes at many PS. GCloud, CL1, and so on. Agencies won't have access to costed solutions, they will be dealing with bums on seats via CL1... not really worth going on from here.. You've got yourself in to a situation where any focus on the principle of the situation is out of the window and all will do now is argue the facts of your made up example. What exactly is that going to prove?

He learns that the work will involve a mixture of consultancy and delivery, advising the client but then taking the client's instructions as to which elements to implement. The work is small enough to be performed by one resource over a 6 month period primarily at the client’s site, which is at the other end of the country. All Joe’s employees are busy so he decides to perform the services himself rather than turn down the business from a new client. Under current HMRC guidance the end-client will review the "working practices only", and determines "the role" to be “inside IR35”. They notify the agency who is forced to treat Joe as a "deemed employee" and requests his NI number so that the payment due to his company can be taxed as if it were a payment to him personally. Joe will incur significant T&S expenses to perform the contract but none are to be allowed before the payment is taxed. Joe disagrees with the clients view and refuses to provide his NI information leading to the relationship breaking down between him, the agent and the end-client with no economic activity taking place.

Ah..actually no, couldn't be arsed to read any further. There is so much wrong with the rest I'm done.

I'm not trolling you this time. I genuinely cannot see what good that lot does whatsoever.

[RonBW]

The reality is that it is not only "working practices" that determines IR35 status. Read my example again and you might understand why.

You're right, of course - it is the reality of the engagement and whether the role is subject to all three pillars of employment or not. If the engagement fails all three laid out in RMC then it must be inside IR35 if the rest of the legislation applies. If the engagement falls down on one of the three pillars then the engagement must be outside IR35.

In your example, the client has made an assessment that all three pillars of employment are found to exist, and therefore the engagement is akin to employment, and from April 6th tax is deducted from the payment. Joe doesn't agree with the assessment so decides not to take the work on. Fred (another contractor) applies for the work and does it. There is no macro economic impact - though Joe has lost out by declining the work.

Alternatively, the client is educated to accept that in this situation, at least one pillar of employment is missing. They decide not to use the HMRC tool because it is optional, and are confident that their assessment and the way that they will engage the consultancy to do the work is outside IR35. Joe's company (and whoever works for the company) performs the contract for services to the client assessment. The agency does not deduct anything because the client has assessed the work to be outside IR35 and because they engaged a consultancy for solution based delivery rather than to just supply a body to be directed.

By all means, write the letter to your MP, but don't be surprised when you get a boilerplate reply that shows that they haven't even read your detailed complaint (particularly if you have a Conservative MP). If they pass it to HMT, you will get a letter back explaining why they aren't after genuine businesses, they want the tax avoiders.

I've saved you the price of a stamp.

[WordIsBond]

Thing is, OP's scenario isn't that far-fetched. He just described my business. I have several employees, and also use sub-contractors. My employees are minor (<5%) shareholders. I do not always have contracts for them, but I have product development ongoing so I keep them on, working on that when they don't have contracts.

How is that financed? Well, sometimes I rely on revenue from the contracts I personally work on. If my personal contracts got dragged into IR35, I would have had to let one of my employees go last year.

If there were a big contract that I could take on and hire someone new, and the client said it was inside IR35, I couldn't do it. Which would be totally stupid, because I'm running a business, I'm not a disguised employee. And it would mean one less person employed, one less person paying tax and NI, one more person on JSA. All because of IR35.

IR35 seriously distorts business behaviour. It does that because of previously existing distortions in tax law. Gordon Brown had two good options. He could have reduced the distortions (something Osborne did with his dividend tax, BTW) and made IR35 unnecessary. Or he could have said that the distortions were worth having because they encouraged entrepreneurship, and if a few people took unfair advantage it was worth it because of the overall benefit to the economy. (We do that with benefits, we say that the overall benefit to society outweighs the fact that some take advantage. We could have done it with tax.)

But Brown being Brown did neither. He added more distortionate tax law on top of the existing distortions. And it creates a problem for people like me running a business, because I have to have IR35 insurance and get contracts and working practices reviewed. Everyone knows that IR35 wasn't intended for people like me, but HMRC will still use it against me if they get the chance, so I have to protect against it. Absolutely stupid.

[breaktwister]

IR35 cannot apply because they are employees. Period.

All a director of a limited company needs to do to be an employee of that company is to say so. He doesn't even need a written contract.

My example was correct, it is nothing to do with "already being an employee" but everything to do with having a material interest in the company receiving the earnings. Which leads to the absurd situation that Joe, as a clearly legitimate business owner (and employee of a limited company), is being forced onto a clients payroll.

[breaktwister]

Ah..actually no, couldn't be arsed to read any further. There is so much wrong with the rest I'm done.

I'm not trolling you this time. I genuinely cannot see what good that lot does whatsoever.

Once again, you miss the bigger and more important points. Looking at the facts, does anyone think that a Court will hold Joe as an "hidden employee" of the client? It is very clear that Joe is operating a business and the client is a business client and not his employer. The fact that HMRC has a set of guidance/tool that spits out a "hidden employee inside IR35" determination in contradiction of the actual legal position is the point.

I have heard people on here say "working practice trumps contract" but the overall question of "is this individual in business on his own account" trumps working practice.

[breaktwister]

it is the reality of the engagement and whether the role is subject to all three pillars of employment or not.

This is HMRC propoganda. The question of employment status is whether the individual himself could be deemed to be in business on his own account. The determination is not solely "role based". But this type of consideration does not suit HMRC as it means that end-clients are unlikely to have all the facts available to make such a determination, only the PSC can answer the question and then it is up to HMRC to challenge (as the law was previously)

EDIT: net dropped and didn't realise this had posted, sorry

[breaktwister]

it is the reality of the engagement and whether the role is subject to all three pillars of employment or not.

This is HMRC propaganda. The question of employment status is whether the individual himself could be deemed to be in business on his own account and the actual legal determination is not solely "role based". Role is only a part of it but this does not suit HMRC as it means that end-clients are unlikely to have all the facts available to make such a determination. The reality is that only the PSC can answer the "real" question leaving it up to HMRC to challenge (as the law was previously).

[RonBW]

This is HMRC propaganda. The question of employment status is whether the individual himself could be deemed to be in business on his own account and the actual legal determination is not solely "role based". Role is only a part of it but this does not suit HMRC as it means that end-clients are unlikely to have all the facts available to make such a determination. The reality is that only the PSC can answer the "real" question leaving it up to HMRC to challenge (as the law was previously).

Acutely, it's not HMRC propaganda - it's substantial case law over the past 17 years with specific reference to IR35 and 49 years with respect to RMC.

But good luck in your letter writing campaign - be sure to let us know how you get on.

[m0n1k3r]

All a director of a limited company needs to do to be an employee of that company is to say so. He doesn't even need a written contract.

A director IS an employee of that company.

https://www.gov.uk/working-for-yourself

[breaktwister]

Acutely, it's not HMRC propaganda - it's substantial case law over the past 17 years with specific reference to IR35 and 49 years with respect to RMC.

You must not have read much of the case law, or understood it, if you think that a single role-based analysis is enough to determine employment status, especially when a contractor has multiple clients, either concurrently or within a short period of time.