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Budget genius, IR35 stupidity, and the end of austerity (or not)...

12/10/2018 by Webmaster

You don't have to be very long in the tooth (says an old accountant) to remember when the Chancellor's budget was a bit of an event. There was the “grave disorder” in 1988 when Nigel Lawson cut the top rate of tax to 40% and Alex Salmond was thrown out of the House. Or in 1996 Ken Clarke's “Rolls Royce” recovery budget managing to do very little – all smoke and mirrors - with the next election looming. Contrast that with Gordon Brown's £100bn tax raid on pensions schemes starting in 1997, leading to the end of surpluses in final salary schemes, and signalling the end of worry-free British pensions. 

Whether it was in November as I seem to remember from the 1980s. Or in the spring. Or back to November a few years ago. Budget day was something you marked in your diary and studied in some detail. But did you notice Philip Hammond's recent little shimmie? He moved the budget forward again – this time to a Monday, instead of the usual Wednesday (Halloween!). Perhaps more related to EU events than anything else. And we will have to wait and see whether his attempt to gird up our pre-Brexit loins is undone by dissent from DUP ranks, or his legislation makes it through to the statute books after all. 

So what can we expect on 29 October? No tax cuts, however much the Chancellor might like to deliver them. There is an obvious need to raise money for the NHS and to boost Universal Credit by at least a token amount. There is not going to be an election - of course - but just in case it would be best to avoid a blatant rise in income tax rates. So expect a great deal of tinkering at the edges and increases in allowances being delayed or scrapped. Lowering the VAT registration would mean more small businesses have to charge their customers VAT – and that creates a multitude of small price increases that are harder to blame on the government. Do small businesses get a vote? 

A “google tax” on big business would be popular, but difficult to draft and enforce. A tax on domestic property gains has been mooted, although how it could fit with CGT and Principal Private Residence Relief is far for clear. Local Authorities may feel Philip Hammond's wrath this year – after all they definitely don't get a vote, do they. 

The BBC reports today “The Treasury is finalising plans to overhaul tax rules which allow self-employed people to avoid paying national insurance contributions. The move will be targeted at people who set themselves up as private companies to take on work. The BBC understands it could be announced in this month's Budget.”  Sloppy journalism? Oh for the days when we knew the difference between tax avoidance (good) and tax evasion (bad). So what is that all about? 

Back in 2000 HMRC introduced its “intermediaries legislation”, usually referred to as IR35, and it has been a spectacular failure. The directors of limited companies generally take the view that they are not within that tax regime. There are grey areas within grey areas that make that an easy decision. And HMRC has lost tax case after tax case. As a result, shareholder/directors pay themselves a small salary and high dividends, and there is no National Insurance on dividends. 

From April 2017, public authorities (widely defined) have had to decide if their contractors would have been employees were it not for the pesky limited company that the contractors tend to use. And prudence dictates that the authorities – often using the HMRC status indicator tool that is clearly not fit for purpose – would rather pay the extra NI than risk being shamed for being in breach of the rules. So the public sector tax take is over £410m in 10 months, and the tax man is now looking at an easy £1bn by extending the same regime to the private sector. 

Where that £41m a month extra tax take has come from is an interesting subject. How much is employers' NI (paid by the local authority employers) and how much would have been tax and NI payable by the contactors is disputed, but David Chaplin, chief executive of Contractor Calculator says 84% is employers NI. So to an extent the local authorities are paying the cost (but with implications for daily rates). 

The system is complicated and has, some argue, led to a “brain drain” from the public sector, for example with 1 in 4 locums giving up NHS work. And then the inevitable and unanswered question from the muddling of employment law and tax law: does the deduction of NI mean you have employment rights? The Telegraph reports, for example, the case of Frank Garofalo - ironically a cost cutting consultant. He takes the view he is not caught by IR35 but his public sector employers impose it anyway. He is left £1,000 -2,000 a month worse off without knowing if he is entitled to holiday pay or sick pay. Yet HMRC continues to duck the employment law questions their legislation raises. 

Earlier this year there was a “consultation” on off-payroll working in the private sector. I remain sceptical about how little heed HMRC ever pays to consultation responses, hence the quotes. There were also three “consultations” on employment status, by the way. But 34 questions were asked on off-payroll working and here are my general views on the likely and very unfortunate outcome. 

Employment Status

There is conflict between (1) an employee (2) a worker, and (3) the self-employed within employment legislation and (a) employee and (b) self-employed within the tax legislation. The recent spate of “gig-economy” cases giving the self-employed entitlement to holiday pay and other rights normally associated with employees only serves to muddy the issue further.

When it comes to tax status, HMRC relies to an extent on employment law and “mutuality of obligations” (MOO), and in employment law MOO was regarded as a last resort to demonstrate that there is an employment contract. Where there is already a documented contract, MOO shouldn't need to be used at all – but, inevitably, HMRC does not share that view.

IR35 isn't meant to determine employment status at all. It should examine a hypothetical contract to decide of the contact is one for service or for services. Why look at a hypothesis where there is already a real contract available for examination? 

Employment Status Indicator Tool (“CEST”)

There is a “check employment status tool” on the HMRC website. It does not work. It is too subjective. No-one should be expected to rely on it as it currently exists, and if and when changed it needs a period of testing to see how it beds in. 

HMRC has had one recent IR35 win, and the case was clear cut and probably should have been conceded long before it went near a tribunal. Christa Ackroyd presented “Look North” for BBC and her contract had no substitution clause. She was totally dependent on the BBC and had a 7 year contract. She fell foul on mutuality, substitution, and control. The case had none of the grey areas other tribunals have looked at. 

Jensal Software for example related to an IT contractor. He worked through a recruitment agency. He was free to work for other clients too. He was virtually unsupervised – his instructions were limited. There was a substitution clause. He was taking a financial risk. The judge was clear that he was in business on his own account and was not caught by IR35. So it seems as long as you possess the key factors you have a strong argument that IR35 does not apply to you. And the key factors are – substitution, control and mutuality of obligation. 

Substitution: does the contract provide that a reasonably qualified substitute can be sent, and in practice is it at least possible that this could happen. 

Control: is the contractor closely supervised – or is he told what to do and left to get on with it. If so then there is not the same level of control as an employee would have.

Mutuality of Obligation: if there is an obligation to provide further work or for the worker to be able to demand it, then MOO may be a problem.

Other factors: is the contractor taking a financial risk and who has to bear the cost of remedying faulty work, providing own computer and software. Can he work for other clients too. Does he get a parking space, locker, desk, entitlement to sick and holiday pay, being invited to staff functions – all these things can be part of the judgement which is often a balance rather than a black and white decision.


The public sector reforms are very recent, but the Chancellor is under such pressure to raise taxes that he may not be able to avoid the low-hanging fruit that might be claimed by extending the off-payroll public sector regime to the private sector. There are a few problems, however.

  •  There is no adequate CEST test; the tool is unacceptable.
  • There is no effective appeal procedure. Contractors who did not like the public sector's decision on their status simply moved on. Other people took their place, but at what cost? What will happen in the private sector?

  • The employment issues are wider than IR35 and to change the employment intermediaries rules within the moving target of employment status generally will only further muddy the waters.

We will find out on Monday 29th October how desperate Chancellor Hammond's tax grab will be.

The difference between stupidity and genius is that genius has its limits.”

                                                                         (Albert Einstein, or not...)


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