Size and competition nothing to do with IR35, says Revenue
UKTECH's fourth interview subject with IR35 chief, John Hinton, concentrates on the Revenue's justification for targeting small companies with IR35, whilst exempting larger, more established consultancies.
Competition was one of the main arguments of the Professional Contractors Group in its High Court legal challenge against IR35. Our interview with Mr Hinton allowed us the opportunity to ask, what, if anything had changed regarding the Revenue's attitudes towards this issue since the legal challenge finished...
UKTECH- The Inland Revenue uses long-term contractors such as EDS to maintain its computer systems, yet such contractors are not 'disguised employees.'
When EDS hires contractors such as those represented by the PCG to work on Revenue projects, those contractors are, according to IR35, 'disguised employees' and are penalised. Is the test for whether IR35 applies relative to the size of the contractor you are hiring?
"IR35 is not sector specific or size specific. I think we've made that absolutely clear through our guidance" - John Hinton denies IR35 is intended to only hit small businesses
Mr. Hinton- "IR35 has got nothing to do with size, it's about intermediaries. The intermediary may be a one-man service company or you can have an intermediary that's a lot larger - some intermediaries operate in terms of composite companies. All of these intermediaries potentially come under IR35. But it bites only if the working arrangements between the client and the person they're engaging are akin to employment.
"IR35 is not sector specific or size specific. I think we've made that absolutely clear through our guidance."
UKTECH- Contractors could begin to argue, legally, that because they are treated as employees for tax purposes, they should also be entitled to the benefits employees receive. The situation is of great concern to clients and is a direct effect of the introduction of IR35. What is the Revenue's attitude towards this?
Mr. Hinton- "I disagree with this. Whether someone qualifies for employment rights is determined by employment legislation. If I can use a different analogy: In the construction industry you'll come across people who like to think of themselves as self-employed whilst they're fit and healthy. But the moment a worker falls off the ladder is when he decides he doesn't want to be self-employed and puts in a claim for compensation as an employee. Tax law, health and safety and employment rights are different worlds, sometimes using different tests. Employment law now tends to be based around the EU's definition of 'a worker', even if he's technically self-employed for tax as well as someone who is employed. There are slightly different angles and that's always been the case.
"I don't see why we should be concerned that IR35 would make any difference to that and I don't see why we should be concerned about any sort of wave of legal action over this because of IR35. Last year we had the Hewlett Packard case. Mr O'Murphy was an employee of his service company and not Hewlett Packard. We've got no reason to be concerned about the judgment over that - it wasn't a tax case and I don't even know what the tax position was in it."
UKTECH- Contractors don't want to be confused with employees in this context as they say they're genuine businesses and they don't want to have to convince clients they're not going to turn around and do this - allegedly, because of IR35.
Mr. Hinton- "All I can say is 'allegedly'. I can't see any involvement of IR35 in that context."
UKTECH- The primary sector affected by IR35 is the IT sector. How does IR35 sit with the Government's pledges to support the growth of IT in the UK, to make the UK the best place in the world to do business, to reduce the digital divide and to maintain its commitment to promote entrepreneurship?
Mr. Hinton- "The Government doesn't see any inconsistency, simply because IR35 is about fairness and the way in which people work. It's there to deal with 'disguised employees'. They're not the type of entrepreneurial person that the Government is looking to encourage."
UKTECH- So you're not concerned that IR35 could, in practice, stop the formation of say, the next Microsoft in the UK stemming from a contracting business?
Mr. Hinton- "No. This point was raised during the Judicial Review and it really just became a non-issue. I don't see that IR35 has or could have any form of impact on enterprise simply because it is not about bringing people automatically into Schedule E. It's only about treating people fairly over the work that they do.
UKTECH- Isn't this the future of a flexible workforce in the UK though - where there is an alternative to being someone's employee?
Mr. Hinton- "It doesn't matter whether you work all your career for the same employer or whether you work for a year or six months. It's a question of how you do your work. For example whose bidding are you doing? Are you working like an employee or not? IR35 isn't trying to catch anyone. It's about treating people who sit next to each other in the same way and subject them to the same tax and national insurance. If they weren't doing things in the same way, and one could determine whether he sent somebody else to do his work and the client has no say in that arrangement then the worker may not come under IR35. This is because the nature of what is required is different: there's no control and the worker takes a commercial risk in providing his individual expertise."
In our final interview story in the series, to be published tomorrow, we ask what the Revenue has learnt from IR35.