IR35

Congratulations to the Professional Contractors Group, who have wheedled out of the Government some interesting statistics on just how ineffective the IR35 legislation is.  In the 2010/11 tax year HMRC opened only 23 investigations into whether IR35 should be operated.  This was up on 2009/10 (12 investigations) but a considerable reduction on 2007/08 (104) and earlier years.  The tax yield from this has gone down too, from £1.9 million in 2006/07 to £219,000 last year.  You can see the details at
http://www.pcg.org.uk/cms/index.php?option=com_content&view=article&id=8118:pcg-calls-for-action-in-light-of-ir35-tax-yield-figures-&catid=861:press-release-archive&Itemid=1361.

When put against the Government’s total tax take and the number of freelance contractors operating through companies, these figures are insignificant.  It makes one wonder what the ‘deterrent effect’ is that the Government says it sees in keeping the legislation on the
books.

It also makes one wonder what is the point of the service company question, which appears on form P35 (the year end PAYE reporting form), and in the employment pages of individuals’ tax returns.  This was inserted into the tax return in 2008 when HMRC was under pressure from Parliament to ‘do something’ about the low yield from IR35 investigations, and it asks what salary and dividends the taxpayer has received from any service companies (not necessarily ones that ought to be operating IR35).

Rest easy – HMRC is clearly not making much use of this information.  It is quite probable that the question is ultra vires anyway.  Keith Gordon, a barrister at Atlas Chambers, reports in his blog(http://www.atlaschambers.com/members/KMG5.php) on a lengthy correspondence that he had with the Revenue on this one, in which he seems to have very effectively tied them up in knots.  This is definitely recommended reading if you want justification for opting out of answering the service company question.

So David Kirk & Co. Ltd’s policy is that we recommend to our clients that they do not answer the service company question, but do explain why they are not answering it, and we prepare tax returns on that basis unless you ask us not to.

How to cut your VAT bills and have some very satisfied clients

If you are an intermediary (employment agency or umbrella company) supplying clients who can’t get their VAT back, how about not charging it in the first place?  These clients might be public sector bodies (central and local government and the NHS), any other healthcare providers, charities, schools, banks and insurance companies.

Until 2009 HMRC operated what was known as the Staff Hire Concession, whereby under certain conditions intermediaries only had to charge VAT on their mark-up.  This was withdrawn as it was thought to be contrary to European law (or so they said).

The method for agencies

That was until ReedEmployment took them to the tribunal. Reed have form here – they won one of the major VAT cases in the 1990’s, which was how the Staff Hire Concession came about.  This time HMRC were after £143 million, and they lost again: when one sees the amounts of money involved it is slightly surprising
that they have decided not to appeal.  They say (somewhat disingenuously in our view) that the judgment only applies to the facts of the case and has no wider implications – see http://www.hmrc.gov.uk/briefs/vat/brief3211.htm.

Reed’s defence was that there were in fact two supplies: one by Reed of introductory services and the other by the temps themselves of whatever work they did.  VAT would only be payable on the ‘introductory services’ (i.e. Reed’s mark-up), because the temps themselves would be below the VAT threshold.

For a copy of the judgment go to http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01069.html.

This is a model that is likely to interest companies whose clients cannot get their VAT back.  However, great care is needed in drawing up the contracts, as HMRC are known to scrutinise things carefully when staffing companies are concerned, and we recommend that specialist advice be taken.

The method for umbrella companies

The Reed model, above, is unlikely to work for umbrella companies who have contracts of employment with their staff.  However, there is another way of doing this which avoids VAT on the entire supply.  This involves making an exempt supply of a service, rather than a standard-rated supply of staff.  The distinction is a subtle one and hinges around who takes responsibility if things go wrong.  Again we recommend that specialist advice be taken.

For further information and specialist advice on either of these possibilities please contact David Kirk on -845 519 5041, or e-mail him at [email protected].

Employment status: the Supreme Court tears up the contract in the Autoclenz

In the landmark case of Autoclenz Ltd v. Belcher, the Supreme Court has endorsed the approach of lower courts in looking behind the written contract in employment cases to see what was actually going on.  Autoclenz said that its car valeters were self-employed, although they had never worked for anyone else for years and years.  They were found in fact to be employees: the court said that the ‘contract for services’ which they had signed did not reflect reality – see the judgment at http://www.bailii.org/uk/cases/UKSC/2011/41.html.

Courts have always been able to take this approach where they have suspected a sham: however what arenew here are the endorsement of the Supreme Court and the justification given for it, which goes somewhat wider than before. The lead judgment says that ‘the relative bargaining power of the parties must be taken into account in deciding whether the terms of any written agreement in truth represent what was agreed, and the true agreement will often have to be gleaned from the circumstances of the case, of which the written agreement is only a part’.

Reading the earlier judgments in this case, one is tempted to ask why Autoclenz bothered to appeal: the stance that their contract documents promoted had been contradicted by their own chief witness.  The result, though, is likely to be that courts will start looking into all ‘the circumstances of the case’ in instances that are much less clear cut, with many more findings for a status of employment.

 Moral: always make sure that your contracts reflect the facts on the ground.

For further information and advice on employment status, please contact David Kirk on 0845 519 5041, or e-mail him at [email protected].