Living with IR 35

The ICAEW gave a lecture last night entitled "Living with IR 35". The speakers were Francesca Lagerberg from the tax faculty and Sarah Walker of the Inland Revenue.

UKTECH had a reporter at the seminar.

The Great Hall of the ICAEW welcomed nearly 200 accountants and a number of contractors to hear Francesca Lagerberg, senior technical manager at the ICAEW's Tax Faculty and Sarah Walker, assistant director, Inland Revenue personal tax division discuss living with IR 35.

Rodney Taylor, chairman of the London Society of Chartered Accountants' tax committee, joint host with the Tax Faculty, kicked off the meeting by commenting that IR 35 had been one of the most controversial pieces of tax legislation.

Francesca Lagerberg, who is both an accountant and a qualified barrister then briefly ran through the main features of IR 35 before highlighting a number of problem areas. These included:

The double taxation of income that occurs when contractors are taxed on the deemed salary arising as at 5 April from relevant engagements and any subsequent payment of that deemed salary after 5 April. She commented that it was ironic that contractors could avoid the double tax charge if they took their income as dividends – the very situation the Revenue hoped to stop.

Problems for contractors working in the construction industry who suffered cash flow problems by first having 18% of their gross income withheld under the Construction Industry Scheme and then having to pay PAYE and NI on the grossed up income under IR35. They would eventually get the CIS scheme tax back but would lose out in the short term. Francesca mentioned that the Revenue were aware of this issue and might address it by amending the CIS scheme rules.

Francesca also highlighted the problems that could arise if the company year-end finished just before the tax year. Although IR 35 allowed the deemed salary and resulting employer's NI to be claimed for corporation tax purposes this was only once the payment had been made. So for a company with say a 31 March year-end making its deemed salary payment on 19 April relief would only occur in the following tax year. Contractors wishing to avoid this delay would have to change their company year-ends to come just after 5 April.

She also noted that under the IR 35 rules partnerships of contractors could be exempt if none of the partners was entitled to 60% or more of the profits and their share of profits was not based upon the income they brought into the firm. However for partnerships, which were caught by IR 35, there were a number of practical problems relating to such issues as expenses.

Amongst other problems mentioned was that of the timing of the cessation of an intermediary company and the fact that the difference between PAYE and NI regulations could create problems for non-executive directors who might not be caught by the PAYE aspects of IR 35 but could be caught by the NI rules.

Sarah Walker then gave a brief overview of the background to IR 35 before looking at some practical steps contractors could take to assist them in dealing with IR 35.

Sarah's points covered old ground and added little new to the debate. She noted that Revenue statistics showed that contractors earned an average of £50K a year. She did not explain how this statistic was derived given that a year ago the Government's own RIA was unable to quantify with any real certainty how many personal service companies there were.

She also stated that the average employee paid tax and NI of 35%, traditional self-employed workers paid around 28% but contractors in service companies only paid 21%. She also emphasised that IR 35 was generous to contractors in as much as it allowed them to continue to claim their home as their place of business and, hence, could continue to claim travel and subsistence costs as a deduction from their gross income.

She dismissed claims that uncertainty made it impossible for contractors to plan for their businesses by reminding the meeting that any contractor could get a Revenue assessment of their contract and that it was a simple matter to estimate how much salary they should take on a monthly basis in order to meet the likely deemed salary income requirements at the year end. Hence the double taxation issue need not arise.

She also showed a slide of the proposed revised P35 form that companies would have to submit after the year-end. On it all companies would be asked to state whether they provided personal services and, if so, whether any deemed payments had been included on the form. She also noted that the Revenue would shortly be publishing on their web site their revised internal guidance on IR 35 and status issues. Finally she reminded the meeting that the Revenue had a legal right to access agent client contracts and had also requested certain agencies to make returns of their dealings with personal service companies. They would be examining cases where the amount of PAYE and NI was less than expected and the likelihood of a compliance visit next year would be greater than it had been in the past.

The sessions from Francesca and Sarah Walker were followed by half an hour of questions – which seemed to come largely from PCG members. Jane Akshar, a PCG director, noted that she had had legal advice that her contract fell outside IR 35 but that her accountant was recommending that she retained sufficient funds for up to ten years to meet any potential PAYE and NI that could be due if her contract was caught. How could she plan her business on that basis? Francesca Lagerberg thought that if she was confident of her situation then the accountant's view was too cautious. Sarah Walker said she could gain certainty by asking for a Revenue assessment. Jane replied that the Revenue's contract assessment process took too long. Even if they only took the stated 28 days it was too late for her to know how to price a contract she either had to accept or reject.

A second contractor, Mike Brown, noted that while training was an allowable expense for a company with non-relevant contracts it was not allowable when it had relevant contracts. In his situation with both relevant and non relevant contracts and training taken sometimes during a contract and sometimes between contracts he was unable to know with any certainty what costs would be allowed. Sarah Walker stated that provided he had sufficient non-relevant income to cover it he could claim all his training costs. Another PCG director, Kevin Miller, noted that while three contractors who were friends but not related could form a partnership to share profits equally and would fall outside IR 35. But if they formed a company with equal shareholdings, drew equal salaries and shared profits equally they were caught by the full panoply of the IR 35 rules. This hardly seemed fair or logical.

Sarah Walker stated that in the Revenue's view having unlimited liability as a partner made all the difference. Another contractor drew attention to the fact that although IR 35 was supposed to curb the Friday/Monday syndrome there was evidence that large employers were forcing even more employees out into service companies safe in the knowledge that there could be no exposure for them as the client. Sarah Walker noted that the Friday/Monday syndrome was not the only reason for IR 35 and the Government still believed that the new rules would discourage such actions by removing the main tax savings opportunities.

A partner in a small firm of accountants asked if joined up Government was a reality as Barbara Roche was trying to speed the granting of visas to overseas IT workers while two of his contractor clients had decided to move overseas because of IR 35. Jane Akshar also drew attention to the letter in the Evening Standard from another contractor who was leaving. Sarah Walker repeated the often-heard view that the Government had no evidence of any significant movement of contractors overseas.

The meeting Chairman noted that applying the IR 35 tests was very difficult and Francesca Lagerberg commented that anyone hoping to use a supposedly IR 35 proof contract should be very careful as they must reflect the intentions of all parties to the contract. However she also agreed that the employment tests were difficult to apply and had not kept up with modern employment practices. Ultimately she felt someone had to grasp the employment status nettle and bring greater clarity to the scene.

Sarah Walker, who was being assisted by a Revenue status expert Peter Seedhouse, repeated her view that the revenue were giving guidance to those who needed it but she was reminded by a PCG member that Mr Seedhouse had reviewed two PCG members who both worked at the same client through the same agency contract and one had been passed and one failed under IR 35 which gave some indication of the complexity of the situation.

On a question of the revenue's attitude to penalties Sarah Walker reminded the meeting that Dawn Primarolo had given assurances that especially in the early years contractors who were the subject of genuine uncertainty were unlikely to face penalties but would have to pay interest on any under paid PAYE and NI. A final question on whether pension contributions could be carried back or forward once final deemed salaries were calculated had Sarah Walker admitting that she did not know the answer but others opined that the carry back of contributions was due to be stopped.

ICAEW and the Inland Revenue have been invited to comment on the accuracy of this report and respond to any questions raised by UKTECH readers. Use the "Reply to article" facility.