IR35 Consultation Responses?

[eazy]

Duration

Duration should not count, it doesn't in actual B2B contracts, for an example my current client has had this engineering support contract with BP for 15 years, it gets renewed every 2-3 years based on good performance.

If both my client & their client can have this long term B2B relationship, why can't small businesses or one man bands?

[webberg]

These sorts of suggestions may work in the simplest of cases, but business relationships are complicated, and there are good reasons for a separation between employment and tax law. Let me give you a concrete example from my own current experience. I'm in the process of agreeing a contract with a US university for a piece of work that will extend over 3 years. This was based on a joint bid (between MyCo and the US university) to a US federal agency over two years ago, which we've now won. At most, this is going to amount to a few weeks of work in each of those three years, performed in the UK and, being R&D, completely absent any SDC, as well as having no MoO and an unfettered RoS. Are you suggesting that this type of arrangement should be caught? Are you suggesting that a US university can be treated as a UK employer for tax purposes or employment law? This is how real businesses work: across borders, and sometimes with complicated contractual arrangements.

The above (and several other posters) all make valid points. The suggestion we made (using objective over subjective tests) was driven in part by my experience of dealing with the original introduction of IR35 and in part by trying to find a simple system.

As such we accept that it is crude and will not fit every case. The 23 months 29 day limit is an obvious area of potential abuse and rather than detail safeguards there, it is more sensible to await HMRC reaction.

We did think about whether the measure should be based on "full time equivalent" rules. At it's simplest, this says that if you work as an employee one day a week then you count as 20% of a full time equivalent. (There are several measurements used in this are and I've chosen the easiest).

Therefore if your contract was for 36 months (with provision to extend) but your hours worked over that period were say 1,500, then if this is less than 24 months of a full time equivalent, you remain a contractor.

This method easily leads into lots of detail on calculation, when to measure, etc and thus we left out the detail.

We accept that no single test is going to cover all situations. HMRC also know that but want to have a simple test administered by somebody other than them.

Our vision is a test applied by the engager with the repercussions of getting it wrong also with the engager.

If the engager gets it wrong and is picked up by HMRC then the liability for any alleged back tax is theirs.

This leads to a great mystery for me.

I would have thought that engagers would be raising hell over the change in rules as a lot of contractors will be saying, come April, "if you still want me, I must be an employee and at a higher rate than you currently pay, because my overheads (tax) have increased".

Are the engagers indifferent, thinking that there will be more supply than demand?

Are the engagers actually doing anything here and I'm just not hearing about it?

[northernladuk]

Duration should not count, it doesn't in actual B2B contracts, for an example my current client has had this engineering support contract with BP for 15 years, it gets renewed every 2-3 years based on good performance.

If both my client & their client can have this long term B2B relationship, why can't small businesses or one man bands?

Because the line between a one man band being a company and a guy becoming a pseudo permie is very grey and can easily get overstepped... which is the whole point of it.

[webberg]

Because the line between a one man band being a company and a guy becoming a pseudo permie is very grey and can easily get overstepped... which is the whole point of it.

Agreed.

The whole point here is to create more employees and less self employed.

The document specifically says that the IR35 rules have not worked because they have not forced enough people into the employee category. This alleged justification is nothing of the sort but it is indicative of the minds driving the process.

There is a big difference between a company offering support via a long term contract which has a rotating group of employees, business strategy, evolving products and resources, and a one man PSC.

[GB9]

We very much looked at what is objectively measurable and what is more subjective and decided that any system capable of working in most situations had to be weighted to the objective tests.

Contract value is useful. If somebody is being paid at a rate equal to or better than senior employees for more than say 6 months, that's an indication that they are a key person in that business and that losing them would be difficult and perhaps threaten their business.

This again goes against recognised principles.

Businesses usually bring in specialist resource for specific pieces of work when they don't have anyone in their organisation to undertake the work themselves. The rate should be irrelevant. As a contractor I expect my Ltd. to be paid more than senior members of the client as I don't get their benefits.

As you have now shafted me twice, I am going off your proposals!

[northernladuk]

Agreed.

The whole point here is to create more employees and less self employed.

The document specifically says that the IR35 rules have not worked because they have not forced enough people into the employee category. This alleged justification is nothing of the sort but it is indicative of the minds driving the process.

There is a big difference between a company offering support via a long term contract which has a rotating group of employees, business strategy, evolving products and resources, and a one man PSC.

That's completely wrong. The point is to close the tax advantages to fill the coffers. Not to create more employees. I don't think you could be further from the point with that.

[jamesbrown]

The above (and several other posters) all make valid points. The suggestion we made (using objective over subjective tests) was driven in part by my experience of dealing with the original introduction of IR35 and in part by trying to find a simple system.

As such we accept that it is crude and will not fit every case. The 23 months 29 day limit is an obvious area of potential abuse and rather than detail safeguards there, it is more sensible to await HMRC reaction.

We did think about whether the measure should be based on "full time equivalent" rules. At it's simplest, this says that if you work as an employee one day a week then you count as 20% of a full time equivalent. (There are several measurements used in this are and I've chosen the easiest).

Therefore if your contract was for 36 months (with provision to extend) but your hours worked over that period were say 1,500, then if this is less than 24 months of a full time equivalent, you remain a contractor.

This method easily leads into lots of detail on calculation, when to measure, etc and thus we left out the detail.

We accept that no single test is going to cover all situations. HMRC also know that but want to have a simple test administered by somebody other than them.

Our vision is a test applied by the engager with the repercussions of getting it wrong also with the engager.

If the engager gets it wrong and is picked up by HMRC then the liability for any alleged back tax is theirs.

This leads to a great mystery for me.

I would have thought that engagers would be raising hell over the change in rules as a lot of contractors will be saying, come April, "if you still want me, I must be an employee and at a higher rate than you currently pay, because my overheads (tax) have increased".

Are the engagers indifferent, thinking that there will be more supply than demand?

Are the engagers actually doing anything here and I'm just not hearing about it?

I'm afraid you're over-selling this as being a necessarily simple solution that is inevitably imperfect. It is structurally flawed. If you want to have a discrete test, it should be a project-based test, not an arbitrary timeframe. Also, while I superficially agree that the engager is in a better position to determine status, they are not in a good position, and will make a blanket determination in the absence of a significant push factor towards a realistic review (a push factor that is stated upfront as being not under consideration). As I say, overseas clients will either completely ignore this or, in the case of overseas companies with a UK presence (i.e. companies with intel), look elsewhere for suppliers.

[GB9]

That's completely wrong. The point is to close the tax advantages to fill the coffers. Not to create more employees. I don't think you could be further from the point with that.

+1

The point is to generate more tax revenue WITHOUT increasing the number of employees.

[dynamicsaxcontractor]

Agreed.

The whole point here is to create more employees and less self employed.

The document specifically says that the IR35 rules have not worked because they have not forced enough people into the employee category. This alleged justification is nothing of the sort but it is indicative of the minds driving the process.

There is a big difference between a company offering support via a long term contract which has a rotating group of employees, business strategy, evolving products and resources, and a one man PSC.

You have lowered yourself to their level by suggesting these things and making a distinction between small and big companies. Why should I not be allowed to have the same contracts as Accenture/IBM/You name it without paying more tax (IR35 and Expenses).

It would be better for all if the same rules where there for everyone. Raise the tax for us contractors, but then raise it for the big ones too......

[webberg]

Thanks all for this.

Firstly, it was not my intention to denigrate or "shaft" anybody. If my comments have come across that way, you have my apologies.

Secondly, it is a simple test and whilst it could be developed further, it is perhaps too simple.

Thirdly, I used the "employed to employee" analogy crudely. More accurately I should have said increase the tax take, so again my apologies.

Lastly, I have assumed that HMRC will treat one man bands differently from bigger companies. In theory they should not, in practice they do.

I'll cease defending this further.