New IR35 business tests - opinions?

Pennywise

The husband/wife Arctic Systems case was another classic HMRC/Treasury fiasco, just like IR35. The husband/wife issue could have caused untold harm to thousands of family businesses - thank heaven that the Govt have kicked it into the long grass and let's just hope no idiot ever dusts off the file again.

Time and time again, they come up with unworkable new rules to tackle the perceived tax avoidance, and time and time again, the proposals are wholly unworkable and damaging. Just who are these numpties?

Take IR35, how can it morally be fair to subject the worker to both employers and employees national insurance? That's another 25% on top of the 20% tax for someone earning average wages. Marginal rates of combined tax/NIC over 50% are common for higher earners. Is it any wonder that contractors want to find ways of avoiding IR35? You end up paying more tax/NIC than you would have done if you'd been a self employed sole trader, which of course you can't be because of the Agency regulations so another case of one law interfering with another, or lack of joined up thinking again.

Why can't they see the glaringly obvious elephant in the room? It's national insurance! There's no NIC on unearned income such as payroll, rents, pensions, capital gains, etc., so it obviously makes sense to ensure your income isn't "earned", thus creating a huge tax avoidance issue. If they had any guts they'd merge tax and NIC, and apply it to all income and gains, and hey presto, there's no longer any need for IR35! Simples.

Same with the so-called husband/wife tax avoidance. Problem is that one partner doesn't use all their tax free allowance or basic rate band, so higher earning partner "transfers" income to the lower earning partner. Not just for high earners - couples of all income levels do it. Simple answer would be to allow the transfer of some unused reliefs and allowances so that there'd be less need for artificial avoidance strategies.

Is there any hope that the Treasury and HMRC will see sense? Not a chance - just look at the recent foul up with child allowance, pasty tax - they never learn.

chrismac1

Although your posts are normally right on the money, John, that last one seems to miss the key aspect of IR35. The contractor - inclduing Mr. & Mrs. jones, and every single one of my "at risk" clients - gets little say over his or her contract status.

The employer - often via an agency - is the one with the whip hand. If Harriet Harman and her ilk were serious about this issue they should be going after the employers who impose "Friday to Mondays" on their workers to avoid their NI responsibilities, and the like.

The bad news is these guys have tax experts working for them full time. Worse still some of them are major donors to Labour and the Tories. So here's a bright idea - why don't we bully the little guys who don't have big shot tax experts at their beck and call, and who don't make big donations?

John_Pierpoint

How does a "Friday to Monday" contract NI avoidance strategy work?

[I watched a programme on BBC 2 on Tuesday evening, in which an entrepreneur (His mum started the business on a market stall) compared making cushions in a factory in Kirkby (over spill Liverpool) with his other factory somewhere similar in Eastern China.
With wage rates in the UK for machinists, sewing 400 cushions per day, of £6+ per hour versus £1 per hour in China; it is no longer an open and shut case.
He is finding that the monthly pay in China is up from £50 to £250 in the last half a dozen years.
I would have been interested to know how the "stoppages" and employer's contributions work in comparison for the two sets of workers - the dead hand of taxation.
http://en.wikipedia.org/wiki/Kirkby
].

rrobbo

The issue with the BETs is that they simply don't seem to reflect the realities of doing business in 2012, at least from my personal perspective as a Ltd Company Contractor.

Business Premises - I work remotely 95% of the time (my clients are based in North America) and have a home office set-up (as recognised by the tax deductions I make for this). As a business I aim to be as cost-effective as possible and avoid any unneccessary expenditure.

PII Test - My clients insist on 4 separate types of insurance (the joys of working with US companies). 2 Points

Efficiency Test - I worked for 17 years for consultancies and software houses and never saw this in any contract we had with clients (even fixed-price contracts died a death a long time ago). This may just be specific to my industry sector.

Assistance Test - I'm a specialist in my field and have focused on my core competences and it hasn't been practical/cost-effective to employ/manage other resources. My rather niche legacy skills have a limited shelf-life and I'm looking at options to diversify longer-term but the red-tape and overheads associated with employing additional resources are making me avoid that option.

Advertising Test - Due to the specialist nature of the services that I offer I have 30 prospective clients in the world. I know who they are and where to find them and have spent many days/weeks creating marketing collateral (PDF brochures, web-site etc) and chasing leads. I doubt that the internal cost associated with this can be recognised as an advertising budget.

Previous PAYE Test - I haven't worked for my clients previously (whoopee - I don't go negative!!).

Business Plan - I have company bank accounts and could dress up a business plan. 1 Point

Repair At Own Expense - Again, I've never seen this in any commercial agreement. The reality is that as an independent consultant I agree to certain deadlines and if issues arise in UAT that need resolving I will potentially do additional unbilled hours to resolve the problems (something that you're less likely to see with resources from the large consultancy firms). This isn't a contractual agreement, just something that is done to maintain a good relationship with the client.

Client Risk Test - Again, I've never known of a single situation in 17 years as an employee and 5 years as a contractor where a bill wasn't paid (there was the odd dispute over what the price should have been but nothing else). My clients have billion dollar revenue streams and massive reserves.

Billing Test - I do have to invoice the client to get paid (and have to wait about 10 weeks for payment!!). 2 Points

Right Of Substitution - This is a standard clause in the contract that the client provides. 2 Points

Actual Substitution - My clients come to me because I offer a specific set of skills and experiences that they need for certain periods of time to cover certain projects that they'd struggle to cover using their permanent resource pool - realistically there isn't an acceptable substitute who would be able to meet my contractual obligations (as egotistical as that obviously sounds). If I was a bog-standard commodity who could be readily substituted then I probably would be more akin to their permanent employees (no offence intended!!). ** There's a need to qualify this - the client would accept a substitute at my discretion but I wouldn't fell comfortable doing this in most cases purely from a professional pride perspective. Again, substitutions were very rare when I worked for consultancies, it would normally be the negotiated roll-off and replacement if required - very few clients would ever realistically allow unknown/unassessed resources to have access to their systems. Nearly all system log-on agreements are with individuals on the basis that they never share their log-on credentials with any other individual - this requirement often overrides the option for arbitary substitution regardless of what any contract says.

I manage to score the princely sum of 7 points, so fall into the high risk category. I'm not willing to artificially modify my business practices to try to conform with this model - it would be financialy irresponsible as a business owner to do so. I'll have to continue to rely on the structure of my contracts (and my insurance!!) to protect me from Inland Revenue investigations. In the meantime I'll let my income continue to contribute to the (invisible) trade balance and my Corporation Tax to top up the exchequer's coffers so that he can afford to come up with more ways in which he can test businesses (in every sense of the word!!)

chrismac1

What they should post on the website:

"It is official HMRC policy that it is impossible to score more than 10 on this test. If you have scored 11 or more, please read it carefully again as you must have answered at least one question falsely."

zygurat789

These tests should be first applied to all the senior government "employees" who are masquerading as contractors including, I read this somewhere, the head of HMRC

rrobbo

I'm sure that if two contractors worked for the same client doing the same hours at the same rates then they could manufacture a great score (this is intended to be tongue in cheek, so don't hold me to it!!). The point is that blatantly disguised (isn't that a contradiction in terms?!) employees could manipulate this to cover themselves if they could really be bothered to do so.

Contractor A has Ltd Company A and is its sole shareholder/director, Contractor B has Ltd Company B and is also a sole shareholder/director. Both work 40 hours a week for Company C at £50 an hour. What if Company B employs contractor A for 12 hours a week, pays them £10 an hour (around £6k a year) and bills them out to Company C. Contractor B also bills themselves out to Company C through Company B for 28 hours a week. Company A then operates the same way (bills out Contractor A and employs Contractor B who it also bills out).

Now, under the Assistance rule, both Company A and Company B generate over 25% of their income from employees who are not shareholders or directors, so get a massive 35 points.

Not content with that, both companies have contracts with a substitution clause, another 2 points (37 now). When Contractor A decides to have a week off he substitutes Contractor B in his place and vice versa, to get another 20 points (57 now).

Company A then engages Company B to build advertising collateral for £1,200 on a fixed price basis to be completed by date X getting a further 2 points under the advertising test (59 now). Company B also engages Company A on the same basis and includes a clause that any problems will be fixed at Company B's expense, giving an extra 4 points (63 now). Company B then completes the deliverables to Company A ahead of schedule, getting 10 points on the efficiency test (73 now).

Company A and B then bill each other £15,000 for consultancy and refuse to pay each other, getting 10 points on the Client Risk test (83 now).

Just for completeness Company B rents Contractor A's spare room as an office for £1,000 a month to get another 10 points (and Contractor A gets £12k of unearned income) (93 points now).

Throw in a business plan, regular invoices and some insurance and you've got 98 points - if that don't make you bullet-proof I don't know what does!!!! Maybe these tests aren't as onerous as I first thought!!

This does not constitute financial/business advice and I don't in any way condone whatever anybody does about anything .

John_Pierpoint

I wonder how an author manages to provide a substitute.

Any offers to ghost write a (lost) Harry Potter book for 1% of the royalties?

rrobbo

John_Pierpoint wrote: »

I wonder how an author manages to provide a substitute.

Any offers to ghost write a (lost) Harry Potter book for 1% of the royalties?

I'll agree to do it on a fixed price basis with a guarantee to fix any mistakes at my own cost if you promise not to pay me (24 points in the bank!!!).:j

BaconandEggs

Hi, I am a sole trader who gets a low score on that checklist. Am I right in saying that, if I am deemed to be employed, it will be the employer who is liable for unpaid contributions? I am interested in the insurance that people have mentioned, but is it worth it for a sole trader and would it cover me?