Government says 'no' to increase on five per cent

In the early days of the IR35 some organisations supported the idea of a salary/dividend split. The Revenue gave it to them: 95 per cent/five per cent and called it an expense allowance. Recently in Parliament, there were unsuccessful moves to allow a more realistic level for business expenses.

During the Committee Stage of the Finance Bill, Shadow Paymaster General, Richard Ottaway (Conservative MP for Croydon South) supported amendments which would 'replace that arbitrary figure of five per cent with the genuine costs for the intermediary.'

He said: "We are dealing with a sector that works extensively through intermediaries and private service companies, who incur substantial expenditure and disbursements in the course of their duties. There are accounting costs, legal costs, training costs, the cost of supplying support staff and, importantly, the cost of the equipment that will allow the worker to provide the services and maintain the necessary skills at home. There are travel costs, including the cost of motor cars. Those are the normal, day-to-day business expenses of the typical self-employed person. Imposing the figure of five per cent may make the Inland Revenue's burden lighter, but it is grossly unfair on the individuals concerned."

He also pointed out the iniquitous situation, as outlined earlier in UKTECH, which would allow large companies to be exempt from these measures as they are taxed on company profits, while the small independent provider is taxed on company income. Also he drew the comparison that it was 'okay to sell things, but not knowledge'.

Edward Davey (LibDem MP for Kingston and Surbiton) supported Ottaway, stating that this figure had been 'plucked from the air with no particular rationale'.

He said: "If those who run personal service companies are employed, there is no case for a five per cent figure, but if they are self-employed, five per cent. is almost certainly too low. In IT, there are no one-off training courses and accreditations that last an entire career. Training in IT is on-going, and incurs much higher costs than in many other industries. Moreover, there are the equipment costs to which reference has been made. Therefore, the Paymaster General must give a better explanation of why the figure is only five per cent."

The Paymaster General, Dawn Primarolo, described the five per cent as 'straightforward and fair', denying that it had been 'plucked out of the air'.

She explained: "We are not saying that all service companies can have only five per cent of their running costs taken into consideration. The five per cent. will apply to the proportion of a service company's contracts that relate to people in an employee relationship. Those contracts that clearly relate to self-employment - as determined by case law - will have access to the normal arrangements relating to the self-employed or to businesses."

The Paymaster General explained that a Revenue survey of accounts of service companies shows that, on average, they spend two per cent of turnover on 'associated costs', such as accountants' fees and Companies House registration charges. The additional three per cent on top of the average costs made it a 'generous formula'.

Ms Primarolo said: "Even if such companies have to spend a little more in future to ensure that they comply with the legislation, the five per cent that we are allowing is well within their current costs, and will allow further room for manoeuvre. The same service companies that are spending two per cent of turnover are saying that the five per cent that we propose to give them is not enough."

The issue of training costs provoked a heated debate as Conservative MPs pointed out that an employee's training costs would be paid for by the employers, whereas a contractor would have to meet his or her own expenses.

Ms Primarolo said: "It is important to consider how employees and the self-employed are treated under the tax system in relation to training costs, and to consider who is entitled to deductions. The Bill seeks to ensure that an employee will get the same deductions as any other employee. For instance, employees can claim some deductions for training expenses, through fairly restrictive rules. Why should someone employed in a company who decides that they want to improve their position by taking a training course be treated differently?

"Some people (Richard Ottoway) says that the employers pay. Precisely. If a person has an employee relationship with their service company, that raises other issues. I am talking about a person who is employed by a client, and interposes the service company only for tax purposes so as to disguise his true employment status."

Despite the lengthy debate, Ms Primarolo held the position that the five per cent was a generous allocation, as it only applied to employee-deemed contracts and the normal rules will apply to contracts that are deemed to be self-employed contracts where there will be no limits on deductible expenses.

She said: "There is no justification for raising the five per cent. We have gone through the matter logically - we have examined the current costs for companies, increased the amount that they pay and ensured that if employees are involved, they are taxed as such. If a company or a self-employed person is involved, they should be taxed as such, according to their status."

The question of increasing the five per cent was put to a vote and defeated by 17 votes to nine. Regular readers of UKTECH may recall a recent article about some MPs' wishes in relation to their own expenses.

Ms Primarolo also reiterated her opinion that IR35 would not prevent people from being self-employed. She said: "The provisions are designed to protect the status of the self-employed and to stop employees trying to access reliefs in the tax system that are designated either for small companies or for the self-employed. The tax rules for small companies were never meant to apply to employees. The Government's position is that the provision affects income only from engagements that would have constituted employment if the person in question had entered into a direct relationship with the client. The Bill seeks to ensure that people in that employee relationship have access only to tax reliefs to which other employees are entitled."