TaxPersonal TaxFollow the commercial facts

Follow the commercial facts

No doubt many felt disappointment when the legal challenge to IR35 failed. Who could have resisted enjoying the thought of the judiciary giving the Inland Revenue a bloody nose?

However, it was not to be, and those operating through personal service companies and their advisers have got to switch away from daydreaming about what might have been at the High Court and instead focus their attention on how to cope with the legislation as it stands.

It is easy and convenient to forget that the government cracked down on PSCs for the simple and sound reason there was a genuine loss of revenue to the Exchequer. Abuse came in two main ways: UK contractors avoiding national insurance by extracting earnings through stupidly low salaries and then topping up the wage with monthly dividend payments; and overseas contractors using PSCs to avoid handing over cash to the Revenue, knowing they would have long left the country before a tax inspector called.

No-one could argue with a need to crack down, but the way the government reacted – or, rather, over-reacted – was to create IR35. But this legislation was poorly designed and poorly targeted.

The good news is, although the Professional Contractors Group may not have won its action, at least the case has generated a high-profile debate about the nature of employment and self-employment in the economy of the 21st century. The judgement may not have given David a clear-cut victory over Goliath, but it should have sowed a seed of doubt within government.

The world of work is changing. Senior civil servants in the Revenue may be enjoying a job for life and a nice pension when they finish, but few of us are so lucky. Over a working career we may well work through different structures, teams and collaborations. A government wanting a knowledge-based economy should encourage such fluid structures as the channels for wealth creation.

If individuals are genuinely taking on the risks of entrepreneurship and wealth creation, then this should be recognised by the tax authorities.

Tax law needs to follow the commercial facts. We still have to see how the Revenue will interpret and implement IR35 in practice but, for now, PSCs must learn to live with IR35.

The Revenue may act with sense and realism. If it does, the court battles of the last few weeks will have been worthwhile.

  • Peter Williams is a freelance writer and director of Kato Publishing

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