On 12th December the contractor website Shout99 published an initial roundup or reactions (from Minor to Major to the proposed new changes to the IR35 rules). Comments varied with some commentators suggesting that the changes are in essence only minor. Our view is that the changes will have serious consequences – see our previous article on this. However we were asked by Shout99’s editor whether we had any more notes on “office holder” – our managing director’s response to the Shout99 article was as follows:
“HMRC as you know has taken a laid back approach to IR35 over the years, mainly through lack of resources. The government is now hell bent on actually recovering as much tax from so called tax avoiders as possible, with an allocated increase in resources. The idea that this new rule is simply a cosmetic exercise to bring PAYE into line with NICs therefore seems unrealistic, although I agree that those rules will be in line if the Finance Bill is enacted as drafted. I take issue therefore with the proposition that these are only minor changes. The changes are significant, and the only question is the extent to which HMRC will try to enforce them.
Much more likely in our view is that the government intends to rely on the wording to enforce the law, which as proposed includes office holders and those regarded for income tax purposes as office holders. Given that the wording means in simple terms ‘holder of an office’ and that the term ‘office’ is defined in tax law to mean ‘any position which exists independently of the person who holds it and may be filled by successive holders’ it is hard to see that a contractor working in any position which may be filled by successive holders could honestly claim to be outside IR35,
The word ‘position’ contains no magic – if a contractor undertakes a job which existed before the start, or is filled once the contractor ceases work, the rules would seem to apply. There is no ‘genuine contractor’ test and to that extent these rules run roughshod through the business entity tests set up earlier in the year. The test as to whether someone holds or is regarded as holding a position is completely different from whether someone is a deemed employee.
Genuine individual contractors for tax purposes will in future (assuming the Finance Bill is enacted as drafted) only be regarded as such if they are engaged on genuine projects, where there is no role/position capable of being filled. To this extent the law is simply clarifying a position that we at Lawspeed have always maintained since April 2000 that to be successful in avoiding application of the rules the work must genuinely be a project supported by the appropriate form of contract. It is worth noting that the very first IR35 tax case was that of LimeIT where the contractor successfully avoided application of the rules by being able to rely on project clauses in the contract drafted by Lawspeed. Successive cases have supported the requirement for a real project to exist. Substitution clauses have been shown largely to be a sham solution as a right of substitution usually does not live in the real world, again as we have always said. Although we are considering the angles, on the face of it the new proposal could even attack the few cases where there is real substitution, and the holding of a position appears to be synonymous with the provision of personal services.
I don’t wish to be alarmist, I am simply interpreting the legislation on the face of it as a lawyer with 30 years of experience supported by our team of qualified lawyers. Lawspeed has a solid reputation on IR35 and we have helped thousands of contractors and agencies over the years. It will be interesting to know what the stance of insurers will be given the significant additional risk of claims that the proposals will attract if enacted. In the meantime contractors and agencies should be concerned at the change – contractors because the change would affect tax liabilities and methods of working – agencies because change means further administration, understanding the impact, possibly a round of discussion on rates, and probably amendments to contracts.
For now the focus should be on debate with a view to either objecting to the proposals by responding to the informal consultation that the Treasury is running, or accepting them as inevitable (given the government’s determination and apparent public opinion). I can think of some arguments but let’s not forget that the government is also planning to introduce a general anti avoidance rule in the same Finance Bill which also needs consideration!
You may be interested to know that Lawspeed is holding a seminar in Manchester on 18th December to consider these and other agency contractor related tax rules. See more info on www.lawspeed.com/events.aspx and to book call 01273 236236. This is geared more for agencies and service providers than contractors themselves, although contractors would be welcome.”
As we suggest, there should now be a debate as to the potential ramifications of the proposals for the contracting industry. Agencies are likely to be affected adminstratively as indicated above. The consultation, which closes on 6th February 2013, should then be responded to appropriately. Lawspeed is holding a seminar on 22nd January 2013 in London to explain the law and discuss the issues – reserve your place now by calling 01273 236236.
Whatever the outcome it is critical that no one misunderstands the meaning of the words in the Finance Bill which in our view, if enacted, could significantly reduce the opportunity for contractors to save tax by operating through personal service companies and other intermediaries.