Issue 20; 23 September 1999

Newsflash - 'Son of IR35' Announcement

NEWSFLASH IR 35

"Son of IR 35" announcement
At a meeting yesterday afternoon with the Inland Revenue, at which Kevin Miller of the PCG was present, the Revenue officials stated that Ministers had agreed that an announcement would be made as soon as possible. There would be no further discussion except into the detailed implementation of the revised proposals.

It would appear that the request of representative groups such as the PCG, the Federation of Small Businesses (FSB), The Chartered Institute of Taxation (CIOT), FRES (Agency body looking after the small to medium sized agencies), ICAEW, ATIES, CBI IOD and the Engineering Council, for Consultations on these wide ranging proposals has been ignored. It also became apparent that the Revenue considers that compromise proposals from Groups such as the 360 Group, a firm of accountants and ATSCo, a new body representing the large Agencies, are evidence that "Consultation" has taken place. The compromise proposals put forward by these Groups involved raising the requisite tax by Contractors agreeing to pay more Salary and take less Dividend. They have been rejected outright by the Government.

Overall summary of proposals

1. The Treasury Ministers were determined to stop the avoidance of tax and NIC by means of disguised employment. They regarded it as unfair and were going to take steps to stop it.
2. Ministers had taken on board the many comments received and were taking steps to ensure that contractors could still work through their own companies if they wanted to. Hence they were dropping the certification requirement.
3. All end users/agencies could pay the contractor's company gross. It was up to the contractor's company to ensure compliance with the new rules, where applicable.
4. The tests to be applied were those already established in tax law and practice for distinguishing employment and self employment.
5. Where a contractor works for a client under conditions which equate to employment then they would be required to take their remuneration from that client in a form subject to PAYE and NIC, after deducting certain expenses.
6. These expenses would include contributions to approved pension schemes, PI premiums and expenses which were allowable under schedule E. In addition there would be an allowance, yet to be agreed, for the running costs of the business such as meeting statutory requirements. A figure of 5% has been suggested but nothing has yet been decided.
7. After deduction of these expenses all remaining income derived from disguised employment contracts would have to be paid out as salary subject to PAYE and NIC. Compliance with this requirement would be based on tax years not accounting periods.
8. The timetable was that the report stage of the Welfare Reform and Pensions Bill would be passed on 11 October and it should get Royal Assent by late November. Detailed regulations for the National Insurance aspects of IR 35 would be out in January. The tax aspects of IR 35 would be dealt with in the Finance Bill after the Budget next Spring year but would be retrospective to April 2000. Meanwhile the Revenue would want to work with all interested parties to develop guidance on the application of the new rules.

Revenue revised "Son of IR 35" proposals

Kind regards
Andy White
Chairman: Professional Contractors