Fawlty Towers series 2 episode 1 “Communication Problems” includes the moment when Sybil found out that Basil had bet some money on a horse called Dragonfly. At one point, Polly and Basil convince Sybil that the money is Polly’s, but then Polly can’t remember the name of the horse. Basil does actions behind Sybil’s back for Polly (pointing at Sybil, pointing at his trouser zip, flapping his arms like wings), and Polly first guesses Birdbrain, then Fishwife, Flying Tart, and then correctly guesses Dragonfly and Basil runs off.
However, whilst Dragonfly the horse was lucky for Basil (almost), Dragonfly Consulting Ltd was not lucky for Mr Jon Bessell. Yesterday, the Court of Appeal handed down their decision in his appeal (against the Special Commissioners of HMRC) stating that the work he did for the AA over the period 2000-2003 falls within the scope of IR35. The implication of this is that Dragonfly Consulting will have to pay £99,000 (plus penalties) to HMRC in unpaid taxes and National Insurance contributions.
Essentially, many self-employed people (not just in IT – a sizeable number of people in Finance too) work through their own limited company. The issue is that the IR35 legislation essentially performs a lookthrough test, and decides whether, if the intermediary (which might be the worker's own limited company and/or a recruitment agency) were not there, the relationship between the worker and the end user client would be one of employment.
Since the legislation came in, many companies have made a lot of money by offering supposed solutions to workers in this position – contracts that claim to avoid IR35, off the shelf limited companies for the worker, with the selling point of maximising the worker’s take home pay. More recently, the industry (for it is an industry – the big players have even recently set themselves up with an industry trade body) has moved towards offshore solutions. However, the crux of the matter is that HMRC do not like this, and if someone does work where the reality of the situation is that they appear as an employee, then HMRC will seek to tax them as such.
The primary advantage (to the worker) of the limited company set-up is that they can take a small salary (often as low as £5,000) and receive the rest of their earnings as dividends (which are taxed differently) – specifically this allows them to avoid the 40% income tax bracket – which is precisely what HMRC does not want.
The tests used to identify the status of a relationship are control, integration, economic reality and mutuality of obligation. This particular case focused in particular on Control and Mutuality (and related to both, Substitution). The fact that in reality Dragonfly Consulting could not substitute an equivalent professional at no notice was held to be crucial. The Intention of the Parties was summed up by The Honourable Mr Justice Henderson as: “statements by the parties disavowing any intention to create a relationship of employment cannot prevail over the true legal effect of the agreement between them” – i.e. that despite the fact that neither the AA nor Mr. Bessell wanted their relationship to be seen as an employment one, that is immaterial when the Economic Reality of the issue is considered.
ADVICE FOR WORKERS
Without delay, talk to your accountant and solicitor, and see what the implications of this decision are for you. If you spend a few months working for one client, then the next few months with one different client, then it is likely that this issue could apply to you.
Specifically, your risk is a demand for payment of (deemed) tax and NIC due within the relevant time period, remembering that the company will also have to pay the employers NICs.
ADVICE FOR COMPANIES EMPLOYING CONTRACTORS
Be aware that different legislation gives HMRC the power (in certain circumstances) to go to the recruitment agency and/or the end user client for certain unpaid tax debts of the limited company.
If you want people who aren’t employees, then treat them as contractors. If you want someone you can integrate into your structure, then get an employee.
SUMMARY
Be aware of the risks, and make sure that the reality of your working environment reflects the role you are trying to play. Just as Sybil Fawlty always found out what Basil was up to, Her Majesty’s Revenue and Customs will always pursue any money they believe to be theirs – and whether you believe it is irrelevant, rightly or wrongly.
USEFUL LINKS
Professional Contractors Group – http://www.pcg.org.uk
HMRC IR35 Pages – http://www.hmrc.gov.uk/ir35
Google 'offshore contractor scheme' to find out about this (but this comes with a note of caution).
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Posted by: Debt Free @ | February 11, 2009 at 07:25 PM