The Debate – Are there double standards in IR35?

IR35 is good for Hood

By Kevin Miller

The IR35 case of freelance oil-rig designer Bill Hood, who was contracted through his company, Usetech Ltd to the engineering group ABB Vetco Gray, emphasises the government’s one-sided view of what constitutes an ‘abuse’ of the system.

Although he has lost his case in front of the special commissioners, there are elements of the judgement that are somewhat debatable.

The government considers it an abuse for Hood to sell his skills in the open market through his company and pay himself a modest salary, leaving a profit he can distribute as he sees fit. That profit is compensation for the risks he runs and for the employment benefits he foregoes working through his own small company.

But the government refuses to recognise that large employers like ABB are also abusing the system. In evidence given to the commissioner, ABB’s HR manager made it clear that it uses contractors to allow flexibility in its staffing: an approach which, conveniently, reduces its exposure to employment liabilities and costs.

The commissioner notes that Hood ‘would certainly be laid off, with minimum notice, if the project on which he was working came to an end and no other work was available’.

But Hood was not used like, say, a temporary secretary on a short-term basis. He had spent most of a three-year period between 2000 and 2003 working at ABB. As the commissioner concluded, he was managed and controlled in a manner that was virtually identical to that of an employee, except he received no holiday pay, sick pay or other rights or benefits.

As a result the commissioner found that, ignoring his service company, Hood was engaged on a contract that was a contract of service – in other words employment.

The government is happy to tax him as an employee, but sees no reason why ABB should incur any employment liabilities. Obviously ABB pay him a higher rate than they would if he were a real employee. But I wonder if this higher rate fully compensates him for the employment rights and benefits he foregoes? I rather doubt it.

  • Kevin Miller is director Kevin Miller Consulting Ltd.

Ask the man on the street
Andrew Hubbard

Even as I contemplate defending IR35, I half feel that I am committing professional suicide. How can somebody who advises clients for a living put his head above the parapet and respond convincingly to the challenge set by Kevin Miller?

While I do not think that IR35 is a something to hold up as a shining example of enlightened policy and clarity of thought, neither do I think that it is the greatest disaster known to man or an affront to civilised values. Let us have a bit of moderation.

Is there anything fundamentally wrong with the proposition that two people doing the same job for the same reward should pay the same amount of tax?

I don’t think the man in the street would view this as a problem. Yet we have a system that dictates that an employee, a sole trader and a one-man service company could end up paying very different amounts of tax on what is essentially the same amount of income.

Yes, in abstract terms I agree that being a sole trader is very different from being an employee. But let’s be honest, in many cases the reality is that there is no difference. So the argument that IR35 is anti-competitive is really a smoke screen. After all, if the only way people can get work is via forming a service company, there is absolutely no reason why they cannot remunerate themselves with a salary from their service company.

While the tax system allows them to pay dividends and split shares with a spouse, good luck to them. If I were able to, I would certainly provide my services through a company. But let’s not pretend that simply because a number of quite unconnected factors have made it attractive for people to set up small companies to provide services to ’employers’ (who are, of course, pleased to be rid of the burden of employment costs) there is a fundamental assault on individual freedom if the government tries to do something about it.

I hold no brief for the IR35 provisions themselves, which I believe have been largely ineffective, but we should ask ourselves, is the basic principle behind them really so unreasonable?

  • Andrew Hubbard is director of taxation at Tenon.

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