• PCG and Accountax claim another IR35 victory with Tilbury win at Special Commissioners
  
• What is IR35?
  
• How does IR35 work?
  
• What is PCG doing about IR35?
  
• IR35 status cases in progress
  
• PCG advice to freelance contractors
  
• Conclusion

PCG and Accountax claim another IR35 victory with Tilbury win at Special Commissioners

The Professional Contractors Group (PCG) is pleased to announce that PCG member Roger Tilbury from Bedford has won his case at the Special Commissioners.

Issues of substitution and control were apparently key factors in the case of Tilbury Consulting Limited v Margaret Gittins (Her Majesty’s Inspector of Taxes), in which Inland Revenue sought to show that Tilbury was a disguised employee of his end client, Ford Motor Company. His contract was actually with Compuware, to which Ford had outsourced its application management centre.

In handing down his nine page judgement, Mr Stephen Oliver QC concentrated on the facts of the case. These included the fact that Tilbury Consulting Limited had the ‘qualified right’ to send a substitute but had never exercised this, that it was not part of the direct manager from Ford’s function to tell Tilbury how to do the work, and that Tilbury had a different colour pass from the Ford employee pass which did not entitle him to use of the gym. He also noted that Tilbury was paid by the hour, and that it was not a matter of concern to Ford who provided the services, or that some of the work was undertaken at Tilbury Consulting’s premises.

He concluded that Mr Tilbury would not have been regarded as Ford’s employee, firstly because it did not have operational control over how the project was undertaken, secondly because of the right of substitution between Compuware and Ford and between Tilbury Consulting and Compuware, and finally because Tilbury was not part of Ford’s business or undertaking. These factors were, in his opinion, inconsistent with employment.

PCG supported Tilbury throughout the case, and he was represented by Dave Smith of Accountax. On receiving the judgement, 56 year old Roger Tilbury said, “I’m delighted to have won, and relieved that it’s over. It has taken more than two very stressful years to get to this point, during which time I had to put all investment in my business on hold, for fear of tying up funds. I am very grateful,” he added “for PCG’s support and for Dave Smith’s outstanding representation.”

Commenting on the outcome, PCG chairman Simon Griffiths said, “We’re very pleased with the judgement. This significant case re-establishes the core principles of defining an employment relationship based upon the actual contract and the facts, rather than trying to construct a notional contract intended to imply employment. Furthermore, it recognises even a fettered substitution clause as being inconsistent with employment, despite never having been exercised. Roger has been working for the same end client for nine years, being paid by the hour, and it’s encouraging to note that the issues of control and substitution were deemed more important in determining his employment status.”

What is IR35?

IR35 is the “intermediaries legislation” which was announced in the 1999 budget and came into force in April 2000. IR35 was introduced because the Government believed that some people were providing their services through limited companies or partnerships as a means of avoiding tax. IR35 allows the Inland Revenue to treat fees paid to a company or a partnership as an individual’s personal salary.

How does IR35 work?

IR35 applies to individuals (“workers”) who provide services through:

• a limited company in which they own more than 5% of the shares, or
• a partnership in which they take more than 60% of the fee

(the “intermediary”), to another business or individual (“client”). The legislation allows the Revenue to disregard the intermediary and determine whether, if there had been a direct contract between the worker and the client, it would have been a contract of employment, in effect applying the case-law distinction between employment and self-employment to the relationship.

If the relationship is found to be one of “disguised employment”, the fees paid by the client to the intermediary are deemed to have been paid to the worker by the intermediary, and are subject to PAYE and NICs. A fixed allowance of just 5% may be deducted from the fees to cover business expenses, irrespective of actual expenses incurred in running the business or how much is paid to the worker as salary or in any other form.

IR35 applies only where the consultant is a significant shareholder or partner, which in practice means small companies and partnerships. Large service companies are unaffected.

IR35 does not create an actual employment relationship between the worker and the client. The worker gets no employment rights with respect to the client. The intermediary company remains liable for all PAYE and NICs, including employers NICs, on the fees received, and for the holiday pay, sick pay, maternity pay and so forth for the worker.

What is PCG doing about IR35?

PCG has always supported the aim of preventing abuse of the tax system, but warned from the beginning that IR35 was a blunt instrument that would put genuine small businesses at risk. As feared at the outset, IR35 has created uncertainty and made it very difficult for small businesses and their advisers to know where the boundaries lie. The PCG remains opposed to IR35 in principle. It believes that professional freelance contractors are genuinely in business and therefore not, on a correct interpretation of the law, subject to IR35.

PCG is helping its members to show that they are not subject to IR35, by:

• Advising freelance contractors, agents and clients how to draft contracts correctly
• Providing members with Tax Investigation Insurance and access to discounted professional advice and insurance products
• Supporting selected appeals against IR35 status determinations, such as Roger Tilbury’s case
• Seeking test cases to resolve outstanding issues of law
• Meeting regularly with the Inland Revenue to discuss implementation issues

Following consultations with PCG, the Inland Revenue issued a new release of its IR35 guidelines in May 2002, which represented a significant advance. Changes included the following:

• Contract length is no longer considered significant in deciding whether an engagement is subject to IR35.
• Use of equipment provided by the client is no longer necessarily considered to be a pointer to “disguised employment.”
• Several consecutive contracts with one client are not necessarily considered to point to “disguised employment.”
• Greater recognition is now given to factors indicating “being in business on your own account.”
• There is no longer a standard “fail” letter, but an individual assessment of factors.

IR35 status cases in progress

PCG is currently supporting four more IR35 status appeals through Accountax for members, the first two of whose cases are to be heard shortly:

• Steve Milsom of Surton Limited, based in Sandy, Bedfordshire.
• Mike Ansell of Ansell Computer Services, based in Bricket Wood, Hertfordshire.
• Mark Sheerin of Sheerin Consulting, based in Newcastle upon Tyne.
• Ian Buckley of Fortissimo Ltd, based in Warrington, Cheshire.

On a separate note, PCG is also supporting Geoff Jones of Arctic Systems in his Section 660 case.

PCG advice to freelance contractors

• Draft your contracts correctly, using the PCG standard contract templates available to members, or by using the services of qualified professionals who understand IR35 and employment law, such as PCG Affiliate Lawspeed.
• Keep your business records and internal paperwork well organised - not only for IR35 purposes. Trying to backfill absent records during an investigation - and in a rush - is not only bad practice and likely to result in errors, but also in some cases illegal.
• In the event of any tax investigation, including a seemingly innocent PAYE review, seek professional advice immediately.
• Consider taking out PCG’s Route35 cover to complement the Tax Investigation Insurance included within your membership package. It guarantees expert advice and support throughout the whole process of an IR35 investigation and uniquely includes professional support throughout a PAYE compliance enquiry.
• Do not, under any circumstances, submit your contracts to the Inland Revenue. Not only is this likely to result in an investigation if you disagree with the verdict, but it will also mean being declined cover under your Tax Investigation Insurance policy.
• Read PCG’s Guide to IR35, available on the web site.

Conclusion

PCG believes that IR35 is uncertain in its application, and that that is in itself damaging to the competitiveness of small businesses, even when they are not ultimately affected. Furthermore, individuals and companies subjected to IR35 are treated unfairly, in that IR35 overcompensates for any possible loss of tax revenue. More tax is paid by an “IR35 caught” consultant than is paid on a contract performed by an employee of a large consultancy firm for the same gross fee.

IR35 fails to address the underlying issue, which is the disparity between treatment of “earned” and “unearned” income. It also confuses company and personal taxation, and self-employed status with being an employee-shareholder of a limited company. These anomalies can and should be removed from the tax system without penalising small businesses, on which much employment, and the health of the modern economy, depend.