IR35 History | 22 April 1999 | Draft proposals published

Contractors' worst fears had been realised as the Government proposed that anyone operating under the 'direction, supervision and control' of a client or agent was a 'disguised employee' for tax and NI purposes. Rather than targeting the Friday-to-Mondayers, this would have made it virtually impossible for small businesses to operate and compete with the larger 'bodyshops'

Copy of letter sent out by Inland Revenue received on 26th April 1999

Thank you for your letter of 17 April 1999 about the Budget Day announcement of proposed changes to counter avoidance of tax and national insurance in the provision of personal services.

As announced, we are arranging to work with representative bodies on aspects of the practical application of the new rules and on the production of guidance. I attach copies of papers we are circulating to them, as follows:

• a note addressing some concerns raised regarding the Chancellor's announcement;
  
• a description of proposals to meet the objectives announced by the Chancellor;
  
• a set of examples illustrating how any new rules should work in practice;

You will understand that it would be impractical for us to meet with all individuals and companies who might be affected by the changes or all the accountants who represent them. However, if in response to the attached documentation you would like to provide additional input on the practical application of the proposed new rules we will be very happy to consider written comments.

I regret that we are unable to engage in exchanges of correspondence regarding these proposals. In particular, we are unable to respond to specific enquiries with respect to personal consequences of any eventual new rules. However, once the rules have been finalised, full guidance will be made available.

Yours sincerely

Elaine Carey

PROPOSED NEW RULES ON THE PROVISION OF PERSONAL SERVICES ADDRESSING SOME CONCERNS

Responses to Budget Day press release IR35 have raised a number of concerns. Some of these will be pursued in dialogue with representative bodies. However, at this stage it seems worth offering reassurance by correcting a number of common misconceptions:

• the new rules will not prevent individuals from setting up companies (service companies) through which they provide their own services - fears that we may be seeking to emulate other countries in this respect are entirely unfounded;
  
• the new rules will not prevent agency working;
  
• the new rules will not prevent workers and clients from arranging engagements through service companies, agencies or similar intermediaries;
  
• there is no suggestion that contracts covering a period in excess of a certain duration should be treated as employment;
  
• engagements entered into by workers will be subject to the same rules regardless of the size of the organisation hiring or supplying those workers.

The most important point to keep in mind is that the purpose of the proposed new rules is to remove the scope for avoidance of tax and national insurance through the use of intermediaries. The vast majority of businesses do not avoid tax and national insurance in this way and so will not be caught by the new rules.

PROPOSED NEW RULES ON THE PROVISION OF PERSONAL SERVICES SUMMARY OF A POSSIBLE APPROACH

This summary is for use as basis for discussion but is not a consultation document.

This summary should not be taken as a statement of the form new rules will eventually take and is not intended to serve as guidance.

The purpose of the proposed new rules is to remove opportunities for the avoidance of tax and Class 1 national insurance contributions (NICs) which can arise where an engagement is routed through an intermediary (or intermediaries). The changes are not designed to prevent a worker providing his or her services through a third party but should remove any tax/NICs advantages of doing so.

This note sets out proposals for new rules. The proposals can be split into three parts:

• Part 1 identifies the engagements caught by the proposed new rules;
  
• Part 2 sets out how tax and NICs might be charged where the new rules apply;
  
• Part 3 deals with cases where the new rules are not properly applied

1. Identifying engagements where the proposed new rules would apply
   It is proposed that the new rules will:
   
   • apply where:
     
     • an individual ('the worker') holds an office with or performs services for another person ('the client') where the client has a right of supervision, direction or control as to the tasks undertaken or the manner in which they are performed and
       
     • the worker or services are provided under a contract between the client and an intermediary (e.g. a service company or a partnership of which the worker is a member);
   • not apply where:
     
     • the worker's services are supplied incidentally to the supply of materials and/or equipment (e.g. where a lorry and driver are supplied together) or
       
     • where the client is an individual not in business (i.e. services for a householder should not be affected) or
       
     • an engagement is 'exempt' (see below).
     
     

   • The aim is to minimise any impact on those not involved in avoidance. It is proposed, in general terms, that payments by a client to an intermediary with respect to a particular engagement should be exempt from the new rules - provided that:
     

     • any remuneration by the intermediary with respect to that engagement will be in a form subject to tax and NICs and
       
     • the intermediary will itself account fully for PAYE and NICs.

     It would be inappropriate and burdensome to require a client to check that the intermediary had in practice done this. What is required is a system to allow clients, or potential clients, to check (quickly, easily and at minimum cost) whether or not they can make payments gross.

     The only workable approach would seem to be a certification scheme. In broad terms, an intermediary undertaking to pay workers only in a form chargeable under Schedule E and subject to national insurance should be able to apply to be what we will describe as 'certified agency'. The use here of the term 'agency' is perhaps a little misleading. There would be no need to restrict certification to bodies which are employment agencies in the traditional sense. At this stage, there seems no reason not to allow any intermediary to apply for certification where they account for PAYE/NICs on all payments which are effectively in return for their workers' services.

     The idea is that the Inland Revenue would maintain a constantly updated public register of certified agencies incorporating instant access and a helpline facility. The certification process itself should obviously be as quick and simple as possible - ideally something very much akin to self-certification. To allow such an approach to operate effectively, ease of certification would need to be accompanied by appropriate penalties for wrongly obtaining, or using, certification.

   
   
2. Tax and NICs treatment where the new rules apply

   Again in very broad terms, the idea is that where a particular engagement comes within the terms of the legislation and payment made is not covered by the exemption, the worker will (for the purposes of tax and NICs only) be deemed to be an employee of the client. The tax and NICs liabilities of the client, intermediary and worker would be dealt with as follows:

   The client:
   

   • The client will account for PAYE/NIC on relevant payments made to the intermediary or to the worker - broadly following existing PAYE/NICs rules.
   
   

   The intermediary
   

   • Intermediaries who are companies
     
     • Gross receipts from the client will be treated as taxable receipts of the company in the normal way. Income tax deducted by the client under PAYE and primary Class 1 NICs will be allowed as deduction in computing the company's profits.
       
     • In this way, the intermediary need pay no Corporation Tax on the receipts provided the net amount received is paid out to workers as 'salary' - because the salary and the tax/NICs deducted will all qualify as deductions in computing profits for Corporation Tax purposes.
     
     
   • Intermediaries who are partnerships where the worker is a partner
     
     • The partnership will exclude amounts received net of tax/NICs when calculating profits. This will mean that the partners pay no Schedule D tax or Class 4 national insurance on the income.
     
     
   • Other intermediaries
     

     We expect most other intermediaries to become certified agencies. Where they do not, gross receipts from the client will be treated as taxable receipts of the business in the normal way. Income tax deducted by the client under PAYE and primary Class 1 NICs will be allowed as deduction in computing the profits of the business.

   The worker
   

   • will be subject to tax (Schedule E) and national insurance (primary Class 1) on remuneration from the deemed employment (both mainly accounted for by the client);
     
   • will be able to deduct expenses allowable under the general Schedule E rules;
     
   • will be able to receive salary tax/NIC free from an intermediary (within a fixed time limit) - up to the amount of net of PAYE/NIC payments received by the
     intermediary.
   
   
3. Failure cases
   

   There will clearly need to be measures to deal with those cases where a client fails to deduct PAYE/NIC in a case where no certification exemption is held by the intermediary. However, it does not seem appropriate for this to necessitate the unwinding of what has subsequently happened within the intermediary nor for the worker to be chargeable on these sums as income from the 'deemed employment'. The intention is that the client (rather than the intermediary or worker) would be held to account in such cases of client failure. However, as described previously, the intermediary would be held to account where certification is wrongly obtained and/or used.

PROPOSED NEW RULES ON THE PROVISION OF PERSONAL SERVICES ILLUSTRATING THE EFFECTS OF PROPOSED NEW RULES

These illustrations are not designed to represent the facts of existing relationships and are not intended to serve as guidance

1. A draughtsman has for some years been employed by an engineering firm. To reduce his tax/NICs liability and to reduce his employer's costs, the draughtsman's contract of employment is terminated on 28 February and he is re-engaged on 1 March to do the same work on similar terms via a personal service company. The draughtsman is subject to ongoing control as to what tasks he undertakes and how they are carried out. This arrangement should be caught by the new rules.
2. A doctor comes to work in the UK for two years. She is engaged by a private hospital through a UK service company. The consultant in charge directs the doctor as to what work she should do, has ultimate clinical responsibility for the patients and can supervise the doctor in the performance of her duties. This arrangement should be caught by the new rules.
3. A rugby club engages a player through his own service company. If the engagement had been direct the player would have been an employee. The club can control what the player does e.g. they can say in which matches he plays and tell him what training sessions to attend. This arrangement should be caught by the new rules.
4. A large road construction company hires 50 general labourers through a composite service company. Each labourer pays an administration fee of 50 a year to an accountant who administers the composite company. The construction company contracts with the composite company for the provision of the 50 general labourers for a two year period. The site manager employed by the construction company tells the general labourers exactly what tasks have to be undertaken on a day to day basis and how. This arrangement should be caught by the new rules.
5. A local council engages a firm of architects to design a new Civic Centre. Within the terms of the contract the architects must provide three different designs within an overall budget. There is a minimum requirement for office space, amenities, public areas etc. The designs must be completed within a fixed time-scale. The contract details the work to be carried out, timing, specification etc. These issues are agreed at the outset and the council do
   not subsequently have the right to tell the firm what tasks are to be undertaken e.g. they cannot tell them to design something different without amending the contract. Beyond the contract specification, the Council has no control over how the firm carry out the work. The new rules should not apply here.
6. A jeweller's shop engages a window cleaner to clean the shop windows twice a week before opening time on a Wednesday and a Saturday morning. The window cleaner operates through his own company. Here the initial agreement would specify exactly what was required. Although payment would not be made for unsatisfactory work, there would be no question of the shop owner telling the window cleaner how to clean the windows or telling him, for example, to go and clean the windows at his home address instead. The new rules should not apply here.
   
7. A large insurance company has set up a call centre to deal with its car insurance business. It engages a health consultant to give talks to all the call centre operators about back care and ergonomics. The consultant, who operates through her own company, is engaged to give 10 three hour workshops. The insurance company is relying on the consultant's expertise and cannot tell the consultant how to do the work. The contract specifies exactly what is to be done (i.e. 10 workshops) and the insurance company cannot tell the consultant to do something else instead (e.g. to provide treatment for those with existing
   back problems). The new rules should not apply here.
8. A school hires a coach with driver from a local coach firm to take a class on a two week field trip. The provision of the driver is incidental to the hire of the coach. The new rules should not apply here.
9. An IT engineer employed by a medium sized manufacturing company decides to 'go it alone' - leaving employment to set up his own IT consultancy. A few weeks later the former employer engages the consultant to undertake a millennium bug health check on all the company's computer systems. The consultant negotiates a fixed fee for providing a specified service to a pre-determined deadline. The company has no ongoing right of direction or control over what is done or how it is done. The new rules should not apply here.
10. A travel company has had a new computer system installed. The company hires an IT consultant to supply additional technical support and training for staff in the use of the new system. The consultant is taken on for a period of three months to undertake tasks as directed on a day by day basis by the IT manager. The new rules should apply here.
11. The 'head chef at a small hotel is engaged through her own personal service company. The hotel cannot tell the chef 'how' to cook the food but it is able to veto menus suggested by the chef and can, for example, tell her to lay on a special buffet on a particular day, arrange a special themed menu for a particular night or produce special children's meals for a particular group of guests. The arrangement should be caught by the new rules.
12. A vet in partnership spends every Monday working at the local zoo attending various animals as required by their keepers and undertaking other duties (e.g. performing post-mortems, preparing animals for transit, supervising inseminations and providing training on various animal health matters) as directed by the head-keeper. The zoo pays the partnership an annual fee for the vets attendance each Monday. This engagement should be caught by the new rules. However, members of the partnership are sometimes requested to attend animals at other times - for example, when one injures itself in the middle of the night. Such visits are outside the terms of the annual contract and a fee is charged appropriate to the work done. On these occasions the zoo has no right of direction or control over what is done or how it is done. The zoo may reject advice given or refuse treatment recommended but this would not amount to a right of direction or control. In these cases the new rules should not apply.