- 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.
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