IR35 History | 17 March 1999 | Financial advice; re IR 35

Initial analysis of Financial aspects of IR35 on the provision of personal services.

Following the Budget of 9th March 1999 the Inland Revenue issued statement IR35 in respect of the above matter.

The Inland Revenue and Contributions Agency have for a number of years acted jointly to challenge "self employed" individuals and consultants, who they consider are really employees.

Revenue has been lost as a result of a more liberal regime for expenses, avoidance of national insurance by payments of dividends and the payment of wages to spouses for sometimes purely nominal duties.

It has always been difficult for the Inland Revenue and Contributions Agency inspectors to challenge arrangements with companies, albeit single individual companies, because the "consultant" remains an employee.

The Chancellor has now signalled the Government's intention to tackle what it perceives as the abuse of "one person companies" to avoid tax and National Insurance by introducing legislation with effect from 6th April 2000.

The proposals contained in IR35 are something of a departure from New Labour's often quoted admiration for the employment ethos of the United States, which is usually termed "employ at will" with employees taking responsibility for their own welfare.

It can only be hoped that following the promised consultation period the Government does not reach for its sledgehammer to crack a fairly insignificant nut.

The statement suggests that the Government is already fairly well down the road of production of the legislation and that the consultation period is more to consider the practical application of such legislation and to produce guidance.

It can therefore be expected that the legislation will be announced in detail later in the year together with practical guidance. Whether there will be transitional legislation for contracts bridging 5th April 2000 is not made clear.

It is considered unlikely that the legislation would be retrospective.

Individuals currently working through the medium of a limited company and taking advantage of careful tax and national insurance planning are likely to be disadvantaged in income terms, however, they will gain in terms of employment legislation security.

Clearly careful planning will need to be undertaken in the period leading up to 5th April 2000 to minimise any financial hardship. In particular individuals who have established their own pension, sickness and other benefits will need to take careful advice.

Any individuals currently considering establishing their own service company would be advised to defer this until the guidelines are issued unless a distinct short term financial advantage can be demonstrated.

Hopper Williams and Bell 17th March 1999