BACKGROUND TO IR35 Updated 17th september
			Inland Revenue press release IR35 issued on 9 March announced the Government's plans to clamp down on 'disguised employment' where workers exploit 'the fiscal advantages offered by a corporate structure'. Particular reference was made to the 'Friday-Monday' scenario, where a worker leaves full time employment on a Friday and returns the following Monday as a consultant operating through a limited company, thereby paying less tax and National Insurance. The full details of the new rules are undecided. But it appears that the proposals go much further than this and would result in the majority of legitimate contractors being treated as employees for tax purposes. The Inland Revenue has issued a short discussion paper (not a formal consultation document) and has received responses from PCG and other interested parties. It met with representative bodies including PCG on 10/11 June. It appears to be willing only to discuss the implementation of the new rules, not the principle behind them. Meanwhile the Government has proceeded with legislation to implement the proposals by adding an amendment to the Welfare Reform Bill, which would enable the IR to bring in new regulations without further recourse to Parliament. This Bill has been passed by the House of Commons and is currently before the House of Lords. PCG is lobbying members of both Houses of Parliament with a view to overturning these clauses and instituting a genuine consultation procedure to tackle the real cases of abuse. We have set out to Government that we clearly consider ourselves genuine businesses and should be treated accordingly. The IR35 Proposals The Inland Revenue proposes that anyone providing a service to a client such that: 'the client has a right of supervision, direction or control as to the tasks undertaken or the manner in which they are performed' is to be regarded as an employee for tax purposes only. This means that either (i) income tax and NI are deducted from the gross fees by the client, or (ii) the service company becomes a 'certified agency' and under certain conditions is allowed to take fees gross. Case (i) would mean that all company expenses, including accountancy fees, equipment, travel, provision for pensions and sickness, come out of taxed income. To qualify as a certified agency under (ii) a company must undertake to pay the consultant only in a fully taxable form (i.e. no dividends). It appears that any non-working shareholders could take the fees as a dividend. It is unclear what allowances would be available. The rules are to apply to companies of all sizes. Neither the duration of a contract nor the location of the work (i.e. clients or consultants premises) are of special significance. But the main burden will be upon consultants who own their own businesses, since in this case the worker is also the shareholder. The Government has attempted to give examples of how this would operate and has produced a list of cases full of anomalies and contradictions. A head chef is employed through a service company at a small hotel. The hotel cannot tell the chef 'how' to cook, but can veto menu ideas and order special buffets for an event. Therefore the rules apply. A local council hires a firm of architects to provide three building designs. It tells them the time-scale, costs, requirements etc in the contract. The architects then produce them according to the contract. Therefore the rules do not apply. An IT engineer is employed to do a Millennium Bug check. No one tells him how to do the check. Therefore the rules do not apply. An IT engineer is employed to oversee the technical support and training of a new software system on a three month contract. He will undertake tasks on a day-to-day basis as needed by the in-house IT manager. The new rules do apply. A Veterinary surgeon spends one day a week at a zoo attending to matters under the direction of the head keeper. The new rules apply. Recent leaks indicate that the Revenue may be moving towards using the full range of self employment tests as a result of Industry pressure. The PCG view is that full consultation should be carried out in line with the Government own guidelines. One of the options that should be considered is self regulation. Information Links Government Information ref IR 35 IR 35 the original Inland Revenue press release Inland Revenue Discussion Document. Regulatory Impact Assesement (RIA) Submissions made by the PCG Survey of Contractors in IT and Engineering Sector. Submission to Inland Revenue. pdf file Detailed comments on the RIA. pdf file Joint statement from PCG, FSB, ICC and ATIES. Joint letter to Dawn Primarolo. Letter to Dawn Primarolo; 6th July 1999. pdf file Letter to Dawn Primarolo; 6th September 1999. pdf file Letter to Sarah Walker at Inland Revenue; 9th September 1999 pdf file Letter to Tony Blair; 17th September.pdf file Download and complete petition to be sent to the Chancellor. Required by 8th October. pdf file Submissions made by other representative bodies Details on other representative bodies and their submissions Useful articles. Tax: Proposal Cause for concern; FT article on 19/3/99 IR35. countering tax avoidance or helping big business? The Revenue gets personal IR 35: Time to make our minds up Self employed hit back Composite Companies: Working hard to put you out of business INLAND REVENUE: Freelances use web as weapon Other key information engineerjob.com and PCG email newsletters. PCG press releases