Reply to: IR35 loses appeal case

[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.

[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).

[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.

[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.)

[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.

[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.

[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).

[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

[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.

[IR35 Avoider]

HMRC can only recover monies from you personally if it can show that you conspired with the company to "wilfully fail to deduct tax.

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.

However, in certain circumstances Her Majesty's Revenue and Customs can pursue the employee rather than the employer for the unpaid tax or NICs. Those circumstances are where:

Her Majesty's Revenue and Customs are satisfied that the employer took reasonable care and the tax under-deduction involved resulted from an error made in good faith;
Her Majesty's Revenue and Customs are of the opinion that an employee received a payment of income knowing the employer had wilfully failed to deduct any or sufficient tax from the payment;
Her Majesty's Revenue and Customs are satisfied an employee knew of the employer’s wilful failure to pay primary NICs, and those NICs were not deducted from the employee’s earnings.

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

[Integrity]

I reckon you should set up a different company for every contract as a perfectly legitimate defense strategy against the commercial risk of yourself as a director making a wrong IR35 decision.

This demonstrates that the company would only exist as a vehicle for payment, rather than being a business with its own identity, and the supplier actually providing the services.

How does this help to demonstrate being in business on your own account?

[IR35 Avoider]

In which case, why are we worried about IR35 at all? With such an easy get-out, who cares if they win?

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. I reckon you should set up a different company for every contract as a perfectly legitimate defense strategy against the commercial risk of yourself as a director making a wrong IR35 decision. The justification would be not to defend the caught money, but to defend uncaught money from being raided retrospectively to pay the tax bill from a different contract. Of course in practise there would, unfortunately, be no money in the companies for caught contracts either, by the time an investigation was decided.

[malvolio]

by changing I assume scraping was meant?

Perhaps - or we could get it scrapped...

[BrilloPad]

Such is the ambiguity of IR35 which is why it needs changing.

Be careful what you wish for!

by changing I assume scraping was meant?

[DonkeyRhubarb]

Such is the ambiguity of IR35 which is why it needs changing.

Be careful what you wish for!