IR35 Bites

The ministry for the prevention of wealth, HMRC and its masters in the Treasury, is a year into the new IR35 regime designed to eliminate flexible subcontractor arrangements which suit employee and employer. Is it about a marginal increase in the tax take? If you regulate against what the free market agrees, all you’ll do is restrict opportunity. It highlights what happens when civil servants and their overseers control legitimate markets in which they have no experience.

Like a minor public school in the fifties, the state continues its war of attrition against individuality. It is a tenet of fascism that the individual must be supressed. Populism is a dangerous drug. Class A. With needles and tourniquets. Mainlined across the nation, abused by the Johnson regime and caricatured by Trump. Bastardized by Putin.

You didn’t dream of becoming Rowntree (If….(1968)). My peers idolized Malcolm McDowell’s Mick Travis. Professional integrity protects clients from the state while staying within the law and counselling clients to do the same. When sailing too close to the edge, remember the beating scene in If….. and the dramatic denouement. The bastards get you in the end.

Admittedly, openly, from an anti-establishment perspective, if IR35 is the answer what was the question? Or rather I can’t think of a legitimate one. The main reason Philip Hammond won’t be remembered as a dreadful chancellor is that he has been forgotten. In March 2017 he showed his true colours. Announcing a massive hike in self-employed national insurance (which broke a manifesto commitment) Philip Hammond claimed, “It’s only right and fair we should take a small step to closing the gap between the treatment of employed and self-employed people.”

The self-employed community represents roughly 15% of the working population, presumably significantly less than that of voters. It doesn’t have a voice and future historians will see it as a persecuted minority. Self-employed people need to pay the same tax as everyone else; so give them the pensions, the perks, the paid holidays, the sick leave and the job security. Give them the ultra-low tax benefit of an electric company Jag.

You might think IR35 does that but you’d be wrong. You would have fallen into the trap of applying logic to UK Revenue and employment law. It is not the purpose of this article to analyse the inconsistencies but broadly Revenue law recognises two categories, self-employed or employed, while employment law identifies a third, the intermediate “worker”. It’s another example of lazy legislation using the hammer blow methodology of requiring you to decide what you or your employees are then, “we’ll let you know where you’ve got it wrong, tax, penalties and interest to follow.”

For a bad tax aimed at curing a problem that doesn’t exit, there are some surprising positives. High profile cases including Eamonn Holmes have raised public awareness of the problem which might be summed up, if you look like an employee you are going to be taxed like one and pay more national insurance and receive fewer tax-deductible expenses while your client is going to pay (broadly) another 13% on top of your costs.

Other factors include the small company exclusion (two of the three, turnover below £10.2m, assets less than £5.1m, fewer than 50 employees). On the face of it this is sensible, but all the other badges of employment and payroll requirements exist, so expect IR35 to filter down to smaller companies either in practice or through legislation. Similarly, the exclusion of wholly overseas companies is a pragmatic recognition that the UK can’t tax the world.

Where we should give credit is the development of the Check Employment Status for Tax (CEST) tool to find out if a worker on a specific engagement should be classed as employed or self-employed for tax purposes. It’s worth emphasizing that this is entirely separate from the provisions of employment law. It’s a useful device which will help contractors and their employers analyse the decision and document their reasons for it. While there is no statutory definition covering all cases, and it’s hard to see how that could be desirable, it is claimed that the CEST tool will give a decision on a subcontractor’s status 80% of the time. Presumably users will find the test iterative in that they will be able to adjust the terms and the execution of the contract so that the engagement falls outside IR35. The CEST tests will examine practical aspects of the contract in HMRC employment test terms including mutuality of obligations, control of delivery, ability to substitute individuals, financial risk, integration into the larger enterprise, notice periods etc.

It can never be a positive sign that a whole industry arises out of unnecessary regulation. Umbrella organizations exist to employ the worker on payroll, find work, and charge it out for enough to fund their own administrative expenses and marketing, including the employees’ national insurance cost, leaving enough net pay for the subcontractor who in the end has succumbed to the state’s insistence that we all become tied serfs.

It’s a little bit about tax but mostly Big Brother wants to use the tax system to control you, another bad law so that ignorant politicians can answer populist envy of the freedom of the subcontractor whose only benefit is a marginal national insurance saving and access to employers seeking flexibility by mutual agreement. In the meantime, as the May elections come and go, and the high street continues to collapse under the threat of online retailers, what has been done about business rates? In the context of the disastrous failure of a generation of governments of differing hues, isn’t it negligence worthy of Nero that so much effort has gone into a vindictive attack by employed politicians and their lackies on the self-employed community that cheerfully swaps security for freedom and thinks it a fair trade, while the fires of business rates torch the high streets of Britain?

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