Monday, December 1, 2008

Is it IR35 or the pressure to work as a quasi employee?

This is an important distinction and it was the first question to occur to me when I heard about a recent survey.

The Professional Contractors' Group has recently published their 2008 membership survey which makes for interesting reading. Over 1,700 members participated and the results are not as obvious as one might have expected. Unlike some other surveys about which I have previously blogged this one seems to have a high degree of credence - albeit that there appears to be one surprising omission.

Business structure
All respondents were asked the main reasons for choosing the business structure that they have (95% being limited companies). The headline weighted percentage responses were:
  • Commercial necessity 32%
  • Commercial preference 21%
  • Tax advantage 26%
  • Limited liability 19%
  • Other 2%
Business problems
The press release that announced the results also highlighted the fact that 65% of respondents identified IR35 as a problem for their business. Apparently the proportion of respondents citing IR35 as a problem remains unchanged since 2006. IR35 is also identified by 81% of respondents as an issue on which PCG should campaign.

The omission
To be fair this is probably because so many of the contractors provide their services through their own limited companies. And many of them still perceive this as being tax effective - even if tax was not the primary motivation for using a limited company structure.

The simple fact is that many (most?) contractors are effectively obliged to provide their services through a limited company structure in order to secure work. Their customers do not want to risk being deemed to be the employer of the contractors they engage to provide services.

As long as the contractor provides their services through their own limited company the customer can sleep easy. They can treat the contractor as a genuine external service provider or indeed as a quasi employee without any worry as to whether the independent contractors' off-payroll status will be subject to an HMRC challenge.

By insisting on the provision of services by independent contractors through limited companies the 'employers' effectively pass all the risk of dealing with HMRC challenges to the contractor - and the 'employer' also avoids what they perceive to be onerous employment law obligations.

The only reason why IR35 should be a concern is if the contractors WOULD be treated as employees if they supplied their services direct to the customers. If however the contractors were genuinely providing their services as arms length service providers AND we all believed that HMRC would not seek to prove otherwise there would be no need to be concerned about IR35. Its targets are supposed to only be those situations where the contractor would be the customer's employee but for the imposition of the contractor's limited company.

This is the unspoken truth of the ongoing concerns about IR35. Fundamentally it is due to the onerous obligations and costs that employers face and that they choose to avoid. A combination of employment law and the added payroll cost of employers' NICs.

Anyone care to comment?

If you have contractors in your client base you may well find the full survey results enlightening


  1. Yes - I agree it seems like contractors are being led into a grey area by perceived tax advantages to be faced with the threat of being re-classified as employees under IR35.

    Employers for their part are happy to let the contractors take the risk as you say.

    The fear of compliance and litigation on the part of employers is tending to detract from sound business practice and, in addition, the certainty in the taxation system which we are looking for as tax advisers is being undermined.

    Robert Bradley,
    Bradley & Associates
    Chartered Certified Accountants
    Stourport-on-Severn, Worcestershire

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