Friday, July 30, 2010

Double standards at HMRC re IR35?

I had resisted commenting on the story in last week’s Sunday Times about HMRC’s IT Chief leaving his job and being “re-employed” as a contractor through his own limited company.

During the week I have seen it suggested in various online commentaries that HMRC are responsible for double standards here - because of what we know as IR35.

I think it's important to distinguish two issues:

Firstly, we now have proof that HMRC is the same as all other employers in wanting the flexibility to engage with contractors rather than only employees. The CIO in question resigned but was required to cover the vacant role after he left until a replacement could be found. Like other employers HMRC wanted to arrange this without risking the possibility of becoming liable to account for PAYE. The ex CIO had moved into consultancy but, given he was covering his old role an Inspector might decide his employer (HMRC) should treat him as an employee. How do employers avoid this? They insist that the contractor supplies their services through the medium of a personal service company. Employers cannot be obliged to apply PAYE or to pay employers' NICs in such cases.

The IR35 rules do NOT apply to the 'employer' (HMRC in this case). IR35 is focused on the contractor's personal service company. The rules are intended to prevent the contractor from taking dividends from his company and thus avoiding the tax and NICs that would be payable on his 'salary'.

So I would agree there is some irony in this story. And HMRC (like so many other Government departments) are avoiding liability for employers' NICs on payments to this contractor - who used to be their employee. BUT IR35 is not relevant as such.

Then again, maybe the contractor is working on terms that mean IR35 is applicable to the sums billed to HMRC by his personal service company. Will HMRC be checking and arguing the point. Did anyone in HMRC think to tell the contractor he will need to tick the relevant box on his tax return? Is anyone in that part of HMRC who engaged his services even aware of IR35?

What do you think?

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