There can be few people who have not now heard the tale of Ed Lester, CEO of Students Loans, who, to all intent and purposes, was a full-time, highly-paid public servant. After an initial period in an interim position, the post was formalised. However, he sold his services to Government through his own limited company, rather than a direct employee or PAYE Civil Servant.
When it came to light that he was doing this to 'avoid tax and NI contributions', he immediately reverted to employee-status. A Parliamentary debate followed where a full review was promised to root out any other incidences of this practice within Whitehall.(See: Review into Civil Servants' service companies - Shout99, Feb 2012)
In the past few days, more and more examples of this practice have been found, particularly within the Department of Health. Yet there seems to have been very little mention of the vehicle which is meant to stop this 'disguised employee' practice, that of IR35.
There is a general carte blanche feeling building up that individuals selling their knowledge through limited companies is a sham, which is potentially undoing much of the work the freelancer community has done to legitimise their means of operating in the past decade.
There is little debate about the legality of the situation as regards tax law, ie it is a legitimate way to operate. The issue is, whether if it is outside IR35, or inside IR35. If the latter, then as every contractor knows, tax and NIC are due via the 'disguised employee' status.
But is the Lester case being dealt with under existing measures or an exception to the rule? Or a shift in HMRC policy?
Assuming that he is making no case to be anything other than a disguised employee (I am judging that on the speed with which it was announced the arrangement of operating through a limited company had ceased and he would now pay his 'correct share of tax and NI'), then what about IR35?
Why isn't HMRC now trawling through back years to reclaim tax and NI, possibly penalties, as he effectively has admitted he was not entitled to the tax status he was claiming?
Or, is HMRC now adopting a policy that it is happy to let bygones be bygones if every 'disguised employees' changes his or her status when found out?
Or, is Mr Lester and HMRC saying he wasn't caught by IR35, in which case why did he changed his status, when he could have legitimately continued with the arrangement?
While recognising that HMRC wouldn't discuss an individual case, Shout99 asked them what their position on IR35 was in relation to this issue. We put forward a more general query about what action will be taken by HMRC and if any arrangements have been voluntarily stopped but there was still evidence of IR35 will HMRC seek back tax/NIC and/or investigate?
HMRC nicely side-stepped the direct questions and issued Shout99 with the following statement.
"IR35 remains in place and is used to ensure that people cannot gain a tax or NICs advantage by operating through an intermediary. Following last year’s Budget announcement HMRC has been working to simplify the administration of IR35. This includes targeting HMRC’s compliance effort at those who are in disguised employment and making it easier for people operating through personal service companies to understand when IR35 applies."
However, it certainly has not ruled out further action against Mr Lester and others, given it has been widely reported that he operated in this way 'to gain a tax and NICs advantage by operating through an intermediary'.
Will 'disguised employees' operating as contractors now be able to cite the 'Lester defence' in the event of an HMRC challenge to their IR35 status?
An interesting 'watch this space'.
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Susie Hughes © Shout99 2012