Revenue admits IR35 double tax hit is not fair and reasonable

The Inland Revenue has finally admitted that it cannot justify part of IR35 as being 'fair and reasonable' - but explains it as simply being part of the law. However, in true Joseph Heller's Catch 22 style, it does not admit that it is the Revenue which drafted the law and could amend it.

The respected Institute of Chartered Accountants' Tax Faculty has, for some time, been concerned about the anomaly of a 'double taxation hit' on deemed salary and actual salary which straddled the end of tax year. The Tax Faculty, which has already been highly critical of the IR35 provision, has raised this technical point with the Revenue on previous occasions.

UKTECH has learnt that, on the eve of the final Parliamentary nod of the Finance Bill and weeks after the Government was told of this anomaly, the Revenue has acknowledged the case of the double taxation hit, claimed it does not think it is 'fair and reasonable' - but explained it away as - that's the way the law works out - without acknowledging that it is the creator and custodian of 'the law'.

After the Tax Faculty again presented their case to the Revenue, they have received a dismissive reply. The Revenue said: "I would stress, however, that this (double taxation hit) is not because the Revenue thinks this outcome is somehow 'fair and reasonable'. It is simply the product of the interaction between different elements of the legislation in the particular scenario you describe."

Accountancy expert Kevin Miller said: "From the company point of view it has the ability to claim the salary twice as a deduction for corporation tax - once as a deemed payment under the IR 35 legislation and again as a normal deduction for corporation tax purposes. Unfortunately, for a company which only has relevant income there will never be any taxable profits to offset against the tax loss this will generate.

"This makes the impact on the contractor doubly worse. As the Revenue have admitted, in the circumstances outlined by the ICAEW in their correspondence, the contractor will be taxed twice on a single salary payment. The Revenue failed to foresee that the application of the schedule 12 rules would have this effect in situations where a company provides for a salary payment in accounts for a period which ends just before the end of the tax year but does not make the payment until just after the start of the new tax year.

"The provisions for relief from double taxation (section 17, schedule 12) only allow for relief in the case of distributions (ie dividends) and do not allow the Revenue discretion to apply relief to salary payments made after the end of the tax year. For the Revenue to say they accept that this situation is not "fair and reasonable" but to argue that they cannot change the situation because it is the way the legislation has been constructed is farcical. As with so much of the history of the IR35 legislation it shows that the regulations are poorly conceived and have not been subject to proper consultation or intellectually rigorous analysis within the Revenue.

"Their attitude is again indicative of the arrogance that underlies the political thrust behind this legislation."

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Susie Hughes