Tuesday, October 26, 2010

The IoD needs to be careful what it wishes for re IR35

According to AccountancyAge the Institute of Directors:
"has labelled IR35 as a "serious problem" in its submission to the Office of Tax Simplification."
The article references the usual observations about IR35 but omits one key point. That being the risks to Companies (including those run by members of IoD) of engaging self employed contractors. If the Company does this directly the Company runs the risk of HMRC arguing that the terms under which the contractor is providing their service is akin to that of an employee. In such cases the Employer Company would be liable to employers' NICs and for the tax deemed to have been deducted from the sums paid to the contractor.

It is no wonder then that many Companies require contractors to provide their services through the medium of a personal services company. This removes all risk from the (employing) Company. Many Companies are also known to have made staff redundant and then re-engaged them through their individual personal services companies so as to reduce employment costs. In many such cases I understand this facility is also used to reduce pay rates to less than the National Minimum wage.

The rules we know as IR35, and which date back to the turn of the century, only come into play when contractors provide their services to (employing) Companies on terms that would otherwise render them as employees. But IR35 does not affect the (employing) Company. It simply(?) reduces the facility for the contractor to benefit from the arrangement.

I would have thought the majority of members of IoD are Directors of employing Companies rather than owner managers of IR35 companies. And I accept that the IoD may well support a simplification of the IR35 rules. However I doubt they want to create a situation that obliges their members to employ all contractors. This would oblige the employing Companies to pay employers' NICs on what were previously consultancy fees paid to personal service companies.

As and when the IR35 rules are simplified I would expect the obligations on employers to increase - especially those those who encourage employees to provide their services through personal service companies.

As I said on this blog back in July: If IR35 is to be abolished - Beware son of IR35

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