So, who should be paying IR35 Tax and who should not


Paying IR35 Tax

The case of senior management at the Department of Health paying themselves through limited companies, and not paying IR35 tax, has kicked up a storm of rage.

This has caused some worry at the FCSA and PCG.

Stuart Davis, Chairman of the FCSA says:

‘There is nothing wrong or inappropriate for any employer, including the Government to employ contractors at any level of the civil service, if they do it properly, for the right reasons and where those concerned pay appropriate taxes.

‘We would like to remind the Government, and those who are criticising these employment arrangements, that thousands of workers up and down the UK undertake freelance contracting work. So, it is a legitimate and valuable way of working that benefits both employers and employees,

Representing Freelancers

Chris Bryce, Chairman of the PCG which represents contractors, freelancers, interims and consultants, said:

‘The Government is right to look closely at how public servants are being remunerated and where there is disguised employment or tax evasion they should stop it and HMRC should fully investigate it.

‘However, it is fundamentally inaccurate to brand all one-person limited companies as employees attempting to avoid tax.

‘We must ensure we do not create an orchestrated witch-hunt against the nation‘s smallest businesses. That will damage public and private sector growth in the UK.

‘One-person businesses are a legitimate model. The labour market flexibility they provide is vital to the economic recovery of this country’.

IR35 Tax

One understands the nervousness of the FCSA and the PCG.

Furthermore, one also understands what employees of these guys would think who have to pay their full whack of tax.

IR35 was brought in to catch those people who left their permanent jobs on a Friday only to come back as a contractor on the Monday. That was to the benefit of both the company and the employee but to the detriment of tax inspectors and the country‘s purse.

Genuine Contractors

The big question is who is a genuine contractor and who is a disguised employee.

Are most of the senior management at a Government department who have been there for years and perform roles normally done by permanent people, genuine contractors or disguised employees?

One would have to say they were disguised employees.

Private Sector

Although recent interest has been in the public sector, even more of this sort of thing happens in the private sector.

Very often board members at companies including the Chief Executive, have one-year or three-year rolling contracts.

Often that means that they get paid through their limited companies. However, they have the security of permies with three years pay due to them if they get fired.

Are they contractors or disguised employees?

They do not pay IR35 tax.

Disguised Employees

I would say they are, therefore, disguised employees.

They are doing a role no different from someone who was a permanent board member.

It is just a device to save on tax.

Employees Leaving the Company

What about someone lower down the company who left on a Friday and who started as a contractor on the following Monday?

Would these people be disguised employees or genuine contractors?

If they were just doing the same job as before then, yes, I would say that they were disguised employees.

IT Contractors

What about IT contractors who quit their permanent jobs and take work on a short term basis with a series of other firms?

I would say that they are pretty much all genuine contractors.

However, the IR35 legislation snared them in the net.

Furthermore, even Government Ministers admitted that the IR35 legislation had snared more than they had intended to snare.

Umbrella Companies

However, they liked the tax money that this brought in and so they were loth to change anything.

It drove tens of thousands of contractors into Umbrella Companies which made the Government and HMRC an estimated £2bn a year in extra taxes and NI.

Of course, this wasn‘t fair. However, before the PCG, there was no one to lobby on behalf of contractors.

And fairness can go out the door when there is that amount of taxation money to be had easily from people that the Government think can afford to pay it.

Paying IR35 tax it seems is for the rest of us.