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IR35 II and SDC
by ThePower at 14:29 03/12/15 (Letters from Freelancers)
Why do HMRC think they can base IR35 II on SDC only - when they couldn't originally?
I'm sure I'll be rehearsing old arguments here but I'm wondering how a new IR35 base entirely on Supervision, Direction and/or Control can possibly work.

Firstly let me get this right. There is no legal definition of a Personal Service Company. There never has been and there probably never can be.

Secondly, in the absence of this formal definition, IR35 can apply to anyone who owns at least 5% of a company and supplies "Personal Service" via that company.

Now, under the current IR35, the determination of so-called "Disguised Employment" relies on both the working practices within a project and the commercial relationship between the intermediary and the client. Thus, however much Supervision, Direction and Control there is between the end client and the individual performing services, certain commercial considerations e.g. Right of Substitution, Fixed Price Deliverables, Mutuality of Obligation can nullify these factors.

Imagine now a consultancy equally owned by 10 practitioners. They advertise for contracts (maybe even employing a salesman to develop business), refuse to name individual consultants on their contracts and have a Substitution clause in every one of them.

They charge out consultants at a daily rate (negotiated by the salesman or consultancy manager) but pay them a fixed salary (maybe with bonuses depending on the value of work done or maybe not). The company can retain and invest profits with the owners paying tax and NI only on the money they earn. The company may or may not pay dividends. IR35 does not apply due to the commercial nature of all arrangements and the company being clearly "In Business on its Own Account".

Now imagine the new world. Since IR35 II is based entirely on Supervision, Direction and (or worse, "or") Control, a fair proportion, if not all, of the consulting work done may be caught. This means that an individual who does work for a third party may be due to pay Income Tax and NI not on salary actually paid but on the fees the consultancy earns! If one's effective salary is, say, 50% of the charge-out rate (surely not unfeasible in a growing consultancy) one could be taxed on twice one's salary! Meanwhile, office-based staff who do not do any consulting will only be taxed on their actual salaries.

Surely this is ridiculous, is not what is intended by the legislation and the very reason it was not used in the original IR35!


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