Contractors, don't be led by IR35 'antidote' touts

In anticipation of an adverse IR35 announcement at Autumn Statement 2015 some ‘tax experts’ (I use the term advisedly) are already prescribing what they suggest is an antidote, writes Carolyn Walsh, a director of CWC Solutions.  

The latest I've heard from them is that, from next year, PSC contractors should employ an employee (other than themselves of course) in order that the director is able to continue contracting through their own PSC.

I have advocated this myself, because the employer PAYE scheme under which a director is paid a salary is ready for use in the employment of employees. When this is done for genuine reasons this will not attract the attention of HMRC. It is also true to say that if skilled computer professionals employed an assistant or an apprentice, the IT skills gap would be all but solved! However, employing workers in order to avoid IR35, which is clearly what HMRC would see at the root of the arrangement, is not going to work, and there are two very good reasons why.

Firstly, HMRC regards all intermediaries that are limited companies as service companies, and it maintains that a Personal Service Company (PSC) can employ more than one individual and still be a PSC. So taking on an employee could leave a director with not only his own headache under agency and IR35 frameworks, but the problems of the employee too, unless the contractor takes on full responsibility for all employment costs and provides all the employment rights of the employee.

Secondly, David Gauke, Financial Secretary to the Treasury, announced last year that there is a Targeted Anti Avoidance Rule (TAAR) specifically aimed at PSCs that have been 'set up egregiously', i.e. solely for the purposes of avoiding tax legislation. So this course of action being suggested by the so-called tax ‘experts’ could actually leave contractors in a far worse position by negating their right to supply services through their own PSC.

Where I agree with the ‘experts’ is that it certainly does looks pretty bleak for contractors. Nonetheless, proper consideration must be taken by contractors – and their advisers - and now is not the time to blindly follow the ‘HMRC-approved solution’ sellers, many of whom have been wrong in the past, much to the Revenue’s chagrin; not just taxpayers’.

The sensible approach at present is to break down the latest plan for IR35 into bite-sized pieces. I can reassure you that the severity of the problem is not as great as HMRC has laid out in the IR35 discussion document, or the rumour mongers have since made out.

The truth is that genuine PSC contractors are in no way affected by the expected changes to IR35, apart of course from the fear of being tarred with the same brush as those PSCs that were set up as mere tax avoidance vehicles.

In the future, some contractors may indeed fall inside IR35, but all this means (if an IR35 or employment status adviser makes that ‘inside’ assessment) is that they will have to draw a reasonable salary and treat dividend payments under PAYE rather than for corporation tax under the new dividend tax bands. Depending on income level, some contractors may find that there is not much in it, and the peace of mind gained, plus the fees saved that are currently being paid to accountants and umbrella companies, might not make this quite such a bitter pill to swallow.

Conversely, there are tens of thousands of PSCs that were set up at the behest of temporary recruitment agencies solely to avoid agency legislation, which was doomed to failure in any case. Many are no longer active and HMRC and Companies House will use existing legislation to deal with them.

In the middle ground are the contractors who will not be affected by a change to IR35 legislation. These are the ones who already fall outside of IR35 because the manner in which they supply their services to engagers is not one of employment. At the very least, those who do not work under a substantial level of ‘Supervision Direction or Control’ will remain entitled to work on a self-employed basis, even if working on agency contracts. They will also remain entitled to tax relief on travel and subsistence costs whether paid under PAYE umbrella or when contracting through a PSC.

Contractors who are in this middle ground need to hold their ground now, and ensure that they are not pointlessly mislead towards new tax avoidance arrangements – or ‘antidotes’ - when they are already genuinely outside the agency, MSC and IR35 rules.