Revenue to extend employee-style tax perks to IR35 contractors

The Inland Revenue has announced it will introduce a number of employee-style benefits and concessions for contractors and other businesses who come under IR35. The first announcement, made by Dawn Primarolo, the Paymaster General, concerns the Revenue's Approved Mileage Allowance Payments scheme.

Ms Primarolo said the Revenue will now entitle people who fall within IR35 to the same amount of tax-free payments for business mileage in their own vehicles as employees.

Other draft amendments to IR35 were published today and include:

"It's basically about giving those hit by IR35 the same rights as employees... we're trying to make sure everyone is treated fairly" - A Revenue spokesman

'The ability for service companies who cease trading in the year to claim appropriate relief in their final Corporation Tax accounts for the deemed payment calculation.'

and,

'The choice for partnerships, which reimburse expenses a partner has incurred personally, to be able to claim relief for those expenses in the same way as a service company.'

"This is good news at last! I welcome this news from the Revenue and am pleased they have also taken the opportunity to tidy up some other bits of IR35" - Anne Redston, tax expert

The amendments will take effect from 6 April 2002.

A Revenue statement said: '[The amendments] extend to workers within that legislation the same rights as employees to exemption and relief under the new Approved Mileage Allowance Payments scheme. The tax amendments will be included in this year's Finance Bill. The parallel amendments to the National Insurance contributions (NICs) Regulations are covered by two Statutory Instruments which have been laid before the House of Commons today [The Social Security Contributions (Intermediaries) (Amendment) Regulations 2002 (S.I. 2002/703) and The Social Security Contributions (Intermediaries) (Northern Ireland) (Amendment) Regulations 2002 (S.I. 2002/705)].

'The amendments being made to the intermediaries legislation will make sure those people who fall within it are entitled to the same exemptions and reliefs under the new Mileage Allowance rules as conventional employees.'

A Revenue spokesman said: "It's basically about giving those who come under IR35 the same rights as employees, beginning with Approved Mileage Allowance, as you can see. We're trying to make sure that everyone is treated fairly."

Anne Redston, tax expert and author of the book IR35: Personal Service Companies, said: "This is good news at last! I welcome this news from the Revenue and am pleased they have also taken the opportunity to tidy up some other bits of IR35."

According to Ms Redston, the main changes for contractors are:

"1. Mileage allowances will continue to be treated as tax allowable as at present as long as they are within the limits set for employees after 5 April 2002. This means that a reimbursed allowance for business mileage paid to the contractor by the service company will not be caught by IR35 as long as no more than 40p per mile is paid for the first 10,000 miles; this reduces to 25p per mile after that. For motorbikes the rate is 24p and for cycles 20p. Had these changes not been made these mileage allowances would have been taxed and subjected to NIC within the IR35 calculation.

"2. If a service company stops trading, then the deemed payment date is now accelerated. This means that it will be deductible for corporation tax - at the moment the deemed payment falls due after the trade has ceased, so there is no deduction in the corporation tax calculation. The service company/ contractor would thus suffer double tax. The change is thus very welcome.

"3. Business expenses borne by a partner personally are now deductible in the IR35 calculation - this was not possible before. This will only affect the few contractors who operate via a partnership rather than a company."

The Professional Contractors Group recently wrote to the IR35 Director, John Hinton, after Anne Redston highlighted a fundamental flaw in the Revenue's application of the revised system of authorised mileage rates to contractors who come under IR35.

Kevin Miller, a PCG Director, said: "We welcome this news and await developments with interest. We are pleased to see the Revenue has decided to clarify the matter now, rather than let the uncertainty and worry persist."

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Richard Powell, UKTECH