Bit of a long post this... just thought it might be useful to share any responses that people have actually submitted to HMRC re. the IR35 consultation... This is the first part - looking at those lovely case studies
XLM
-----
Dear Sir/Madam
I am writing in response to the discussion document on the Intermediaries Legislation (IR35).
The discussion document sets out a number of legitimate concerns about the impact on the Exchequer of the avoidance of employment taxes. However, it makes a number of errors in framing the consultation questions which I want to address before responding to the questions themselves.
The two case studies set out at the beginning of the paper are entirely unrealistic
The main errors relate to the case studies that are used to illustrate the problem being addressed in the document. They are both entirely unrealistic.
- Case study 1 sets out two hypothetical individuals - Jo and Ben - engaged to undertake legal work for gross payments of £70,000 per year, and then outlines the tax saved by the Ben of £5,171 and by the engager of 8,541. This tax saving is achieved by both parties due to the fact that Ben operates via a limited company and invoices the legal company for services rendered, whereas Jo is an employee.
This scenario is unrealistic because Ben has no surety of receiving £70,000 per year at the outset of the contract, whereas Jo does. This is a central difference between freelance work and employment. At any point during the year Ben’s engagement could have been terminated by the legal company without liability - for example if the flow of cases had reduced or the profitability of those cases had proven insufficient to justify his costs. That is not the case for Jo, who would have had a statutory notice period in her contract, along with redundancy and other rights that may have accrued.
If Ben had been assured of the £70,000 from the outset, and assured of a continued flow of work to do, then the argument of loss to the exchequer might be sustained. However, this scenario is already well provided for within current employment legislation, where mutuality of obligation (on an employer to provide work and an employee to do it) is one of the central tests of IR35 compliance.
If Ben is not assured of the £70,000 from the outset, then it is likely that he would have fallen outside the scope of IR35, and thus no additional tax would have been due. Since the discussion document asserts that the government does not wish to extend the scope of IR35 in the first place, then there is no loss to the exchequer.
- Case study 2 sets out a similar scenario, albeit this time in the context of an NHS trust, but varies it by suggesting that the NHS trust negotiates a reduction in salary to cover the employers national insurance contributions that it saves. This implicitly makes the same mistake as the first case study by use of the word salary to refer to Sarah’s income. It assumes that Sarah has the same security of tenure that Mark does when clearly she does not. If that were the case, she would fall inside the scope of IR35 as currently defined.
This scenario is also unrealistic because it assumes that the only cost to the employer is national insurance. Any NHS employee will receive pension contributions from their employer of a minimum of 14.3% effective 1 April 2015 (see link http://www.nhsbsa.nhs.uk/i/Pensions/..._Update_V1.pdf). Similarly, most employers have a range of costs associated with paid holidays, sick pay, training and other entitlements that would not normally be subject to employers or employees national insurance or tax. In fact, all statutory employment rights have the same economic effect as national insurance - they increase the relative cost of employing people as compared with other types of investment.
These are real costs, and affect the decision that a trust may make about whether it can afford to take on a full time member of staff, and about the relative costs and benefits of doing so vs. using temporary staff.
Finally, both of these case studies ignore the costs associated with operating a limited company, which would substantially reduce the effective income that you have outlined.
To make the point as clearly as possible, here are more representative costs for your scenario 2.
Mark - gross salary 27,345, net income 21,684
Sarah - limited company turnover £30,000, net income 25,800
- minus £3910 (to match the pension contributions made on Mark’s behalf by the NHS trust)
- minus £2379 (27 days holiday entitlement out of a total 246 working days in each year, which Mark would be entitled to but Sarah would not)
- minus £1100 operating costs associated with running a personal service company (principally accountancy and payroll administration costs)
- plus gain on Flat Rate VAT Scheme of £1050 (assuming that the gain results in a profit post corporation tax of 3.5%, which is typical for a personal service company)
Sarah’s net income is in fact £19,461, not 25,800. This of course ignores the value of sickness pay, training and redundancy entitlements that Mark might expect to accrue over a period of time that Sarah would not receive.
XLM
-----
Dear Sir/Madam
I am writing in response to the discussion document on the Intermediaries Legislation (IR35).
The discussion document sets out a number of legitimate concerns about the impact on the Exchequer of the avoidance of employment taxes. However, it makes a number of errors in framing the consultation questions which I want to address before responding to the questions themselves.
The two case studies set out at the beginning of the paper are entirely unrealistic
The main errors relate to the case studies that are used to illustrate the problem being addressed in the document. They are both entirely unrealistic.
- Case study 1 sets out two hypothetical individuals - Jo and Ben - engaged to undertake legal work for gross payments of £70,000 per year, and then outlines the tax saved by the Ben of £5,171 and by the engager of 8,541. This tax saving is achieved by both parties due to the fact that Ben operates via a limited company and invoices the legal company for services rendered, whereas Jo is an employee.
This scenario is unrealistic because Ben has no surety of receiving £70,000 per year at the outset of the contract, whereas Jo does. This is a central difference between freelance work and employment. At any point during the year Ben’s engagement could have been terminated by the legal company without liability - for example if the flow of cases had reduced or the profitability of those cases had proven insufficient to justify his costs. That is not the case for Jo, who would have had a statutory notice period in her contract, along with redundancy and other rights that may have accrued.
If Ben had been assured of the £70,000 from the outset, and assured of a continued flow of work to do, then the argument of loss to the exchequer might be sustained. However, this scenario is already well provided for within current employment legislation, where mutuality of obligation (on an employer to provide work and an employee to do it) is one of the central tests of IR35 compliance.
If Ben is not assured of the £70,000 from the outset, then it is likely that he would have fallen outside the scope of IR35, and thus no additional tax would have been due. Since the discussion document asserts that the government does not wish to extend the scope of IR35 in the first place, then there is no loss to the exchequer.
- Case study 2 sets out a similar scenario, albeit this time in the context of an NHS trust, but varies it by suggesting that the NHS trust negotiates a reduction in salary to cover the employers national insurance contributions that it saves. This implicitly makes the same mistake as the first case study by use of the word salary to refer to Sarah’s income. It assumes that Sarah has the same security of tenure that Mark does when clearly she does not. If that were the case, she would fall inside the scope of IR35 as currently defined.
This scenario is also unrealistic because it assumes that the only cost to the employer is national insurance. Any NHS employee will receive pension contributions from their employer of a minimum of 14.3% effective 1 April 2015 (see link http://www.nhsbsa.nhs.uk/i/Pensions/..._Update_V1.pdf). Similarly, most employers have a range of costs associated with paid holidays, sick pay, training and other entitlements that would not normally be subject to employers or employees national insurance or tax. In fact, all statutory employment rights have the same economic effect as national insurance - they increase the relative cost of employing people as compared with other types of investment.
These are real costs, and affect the decision that a trust may make about whether it can afford to take on a full time member of staff, and about the relative costs and benefits of doing so vs. using temporary staff.
Finally, both of these case studies ignore the costs associated with operating a limited company, which would substantially reduce the effective income that you have outlined.
To make the point as clearly as possible, here are more representative costs for your scenario 2.
Mark - gross salary 27,345, net income 21,684
Sarah - limited company turnover £30,000, net income 25,800
- minus £3910 (to match the pension contributions made on Mark’s behalf by the NHS trust)
- minus £2379 (27 days holiday entitlement out of a total 246 working days in each year, which Mark would be entitled to but Sarah would not)
- minus £1100 operating costs associated with running a personal service company (principally accountancy and payroll administration costs)
- plus gain on Flat Rate VAT Scheme of £1050 (assuming that the gain results in a profit post corporation tax of 3.5%, which is typical for a personal service company)
Sarah’s net income is in fact £19,461, not 25,800. This of course ignores the value of sickness pay, training and redundancy entitlements that Mark might expect to accrue over a period of time that Sarah would not receive.
Comment