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Budget: Don't knee-jerk against the Lester case
by Susie Hughes at 09:00 15/03/12 (Political News)
With apologies for mixing my cliches and metaphors, is the Budget going to produce a knee-jerk reaction and use a sledge-hammer to crack a public sector nut?
Or, in other words, will the Chancellor use the current outrage at senior Government workers being paid through limited companies - which some are now calling 'tax loophole companies'- to clamp down on freelancers operating in this way.

There is almost a hysteria around the situation with Parliamentary debates; Government reviews; columns and columns of newspaper reports; a new individual 'named and shamed' almost on a daily basis; and freelancer group the PCG taking to national advertising to plead not to 'demonise' their members.

It wouldn't be the first time that a government has used a larger than required sledge hammer to crack a non-existent nut. And, in an irony of timing, this 'tax loophole company' scandal is at its peak as the Chancellor puts the finishing touches to the Budget, the vehicle used to to make changes.

Philip Ross, a regular contributor to Shout99, looks at some of the past lessons which should be remembered and examines the tools already available to the Chancellor to clampdown on this 'abuse'.

After all, IR35 was introduced to stop this, but we've yet to hear that HMRC are investigating this and other cases, which seem to be 'banged to rights'.

Philip Ross writes:


Philip Ross at Labour Party Conference
The best way to create an overreaction is to have a crisis or a scandal, the latest one over Ed Lester and his tax affairs at the Student Loans Company is no exception.
History is full of them, for instance after the financial crisis of the South Sea Bubble in 1711 the decision was to outlaw the use of limited liability companies (joint stock companies) which hampered future development and growth. Most of us remember the introduction of the Dangerous Dogs Act in the 1990s which was another dog's breakfast. Another reactionary case in 1990s followed the revelation that John Birt, then DG of the BBC wasn’t an employee of the corporation but instead received his wages through a personal service company.

This scandal dovetailed nicely with complaints from large businesses that they were being undercut by smaller firms and resulted in the introduction of IR35 in 1999. The aim of the Act was to outlaw practises like those used by John Birt but instead restricted the trade of freelancers in the IT and Oil and Gas sectors to the applause of big business. At the time IR35 was widely condemned by most trade bodies, including the CIOT, FSB, ICAEW and the British Chamber of Commerce. It is also led to the birth of the Professional Contractors Group.

The ICAEW reviewed the tax and gave it a derisory score of 30/100. Although the initial proposals were reformed and it became reliant on case law rather than defined tests, it was hampered because of the lack of case law in knowledge-based sector and in IT.

Since then the tax and employment status of freelancers has been plagued by fear, uncertainty and doubt as case law struggles to catch up. Last year the Tories and Lib Dems ducked the issue and their prior inferences to abolish the tax and instead decided to reform its operation.

At a High Court hearing in 2000 Justice Burton affirmed that the tax had been brought into to tackle the John Birt scenario, but the conclusion from the Ed Lester affair is that it has failed. Strangely enough both these abuses are in the public and not the private sector yet the result of the IR35 was to target the private sector and commerce.

The media reports that Danny Alexander is considering new measures to tackle the Ed Lester case, the irony is that it doesn’t need any, because such legislation already exists and it pains me to say it but it is IR35.

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Every contractor in the land is aware of how the self-employment tests work as applied to IR35. If you pass these tests you can be taxed as a business, fail them and you will be taxed as an employee.

Two key ones are: Are you part and parcel of the organisation, or does everyone know you are a contractor? The second is that you should be able to supply a substitute to do your work if you are unavailable.

Did everyone at the Student Loans Company that Ed Lester wasn’t an employee? Could he supply a substitute CEO to his role if he was away? The answer to both questions I suspect is No, as it was to John Birt’s role.

In 1999 when Minister’s quoted the John Birt scenario we dismissed it as it has nothing to do with legitimate freelance working. No new legislation is required all they need to do is apply the IR35 tests to their own house, I suggest that they updated the guidance on the tax in which there a number of case study examples explaining how the case works in practise.

At present there are ones about characters called ‘Charlotte’, ‘Henry’ and ‘Gordon’. I would suggest adding a new one about ‘Ed’. “Ed is a CEO of a public sector quango and pays himself through a personal service company, he can’t provide a substitute and no one in the organisation knows that he is a freelancer. Conclusion : Ed is a disguised employee and should be caught by the tax”.

Going back to the South Sea bubble crisis in 1711, it wasn’t until 1844 that the moratorium on joint-stock companies was lifted, it is no coincidence that this paved the way for expansion and growth of the second industrial revolution.

My message to George Osborne and Danny Alexander is learn from history and don’t repeat past mistakes.

At present the knowledge based information revolution is underway and it is fuelled by a flexible workforce of professional and skilled individuals.

Any heavy handed legislation to address public sector abuses will hamper private sector growth and development.

It would be the equivalent of shooting ourselves in the foot and would result in more work going offshore and would de-skill the nation.

Philip Ross was one of the founders of the Professional Contractors Group and is a regular contributor to Shout99.

Full coverage before, during and after the Budget will be available in the Political News section of Shout99. The Budget will take place on March 21.

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Susie Hughes © Shout99 2012

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Budget: Don't knee-jerk agains... Susie Hughes - 15/03
    The Budget: brianc - 15/03
       Re: The Budget: fred bloggs - 15/03
    Re: Budget: Don't knee-jerk ag... atelli01 - 15/03
       Re: Budget: Don't knee-jerk ag... brianc - 15/03
    Re: Budget: Don't knee-jerk ag... asif999999 - 19/03
       What do you mean? brianc - 20/03
       Re: Budget: Don't knee-jerk ag... philip ross - 20/03
          My "reaction" ... asif999999 - 20/03
             Re: My "reaction" to your "rea... Patriot - 21/03
                Re: My "reaction" to your "rea... asif999999 - 21/03
                OH GOD ... asif999999 - 21/03
                   Re: OH GOD ... Patriot - 21/03
                      Re: OH GOD ... asif999999 - 21/03
                         Operant conditioning, membersh... Patriot - 21/03
             My MP Michael Gove says brianc - 23/03
                Re: My MP Michael Gove says Patriot - 23/03
                   Crikey TaxedToDeath - 23/03
                      Re: Crikey brianc - 27/03
                         Re: Crikey ukmike8 - 27/03
                         Re: Crikey Plodge - 27/03
                            Italians are so unfair ukmike8 - 28/03
                         Re: Govey Patriot - 27/03
          Re: Budget: Don't knee-jerk ag... brianc - 21/03
          Too much TaxedToDeath - 21/03
             So we are all agreed then! brianc - 23/03

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