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Revenue's IR35 architect explains action
by Richard Powell at 22:05 22/03/01 (Political News)
As the curtain descended on the PCG's judicial review, challenging the legality of IR35 in the High Court, the Government's lead civil servant and architect of the measure, Sarah Walker, gave Shout99 what could be her last interview on the subject. She is currently transferring to the Revenue's Pensions Department, but prior to that, she explained to Shout99 why the Government chose to introduce IR35, its implementation and justification; and the potential impact of the judicial review.
Shout99 previously had a request for an interview prior to the JR declined, so we were pleased when Ms Walker agreed to discuss the background to IR35 after the JR but before the judge's ruling, which is scheduled sometime during the week beginning March 26.

Although Sarah Walker has been present at every session of the judicial review with the Revenue's legal team and has appeared on national television and radio defending and explaining the Government's rationale behind the measure, she is a civil servant who transfers around the Department, servicing the policies as dictated by her political masters.

However, as a senior civil servant, her influence on formulating the Ministers' thinking and understanding of the issue should not be underestimated.

Ms Walker began by explaining the motivation behind the creation of the legislation itself.

She said: "Ministers were concerned that there were people working in certain situations which were clearly the same as employees but were able to pay significantly less in tax and National Insurance than they would if they were employed directly by their clients by using a service company. They didn't think that was fair, and thought there was a problem with fairness between those that were directly employed and paid National Insurance and tax. Those that were using service companies had arranged their affairs to pay considerably less."

A frequently-used term within the Government's thinking has been that 'genuine businesses' would be unaffected, however there has been no clear definition of what constitutes a 'genuine business'.

She explained the terminology: "I think the distinction that is made in the tax system is between an employee and a self-employed person, that a self-employed person has to make an investment in their business and take financial risks and provide substantial amounts of materials and equipment, and a genuine part of the financial risk is that they work for a fixed price for a project rather than an hourly rate. They will have much more control over the way they work whether they work on the client's premises or whether they work on their own premises.

"Those sorts of things correspond generally to a common sense view and certainly to the view the courts have taken as to what the difference is between someone who is in business and is a self-employed person and someone that is an employee and is clearly dependent on their employer for their work."

Judging from the comments from Ministers during the past two years and the case presented during the judicial review, it was questionable whether the 'service companies' who were members of the PCG, could be counted among these 'genuine businesses'.

Ms Walker said: "That depends very much on the circumstances. The fact of having a company doesn't make you a genuine business. We have to look at the way in which you behave and so we're applying those same tests to people with service companies as are applied to people without service companies.

"The Ministers have made clear that they consider IR35 is not just consistent with encouraging growth and innovation but is actually important to ensure that the tax system is able to encourage growth and innovation because it is ensuring that the tax treatment that is made to go to genuine businesses who are taking risks, who are creating wealth, who are creating employment in the economy isn't actually also available to people who are basically the same as employees. If you can't make that separation, then you can't target measures that are intended for genuine small businesses.

"That's not to say that people in the IT industry can't also set up small businesses in their spare time, be innovative, invent all sorts of things at work and when they are doing that kind of work, they will get the benefit of the treatment that is available to small businesses and they will get all the expense deductions and all the tax treatment that go with that. If someone who has been working either as an employee or as a contractor who has been caught by IR35 goes on to set up a small business then they will get all the encouragement thought the tax system that any other small business will.

"If a service company, a limited company, is working in a way that falls within the definition of 'a small business', of the definition of 'a self-employed person' they could also be entitled to the benefits.

"If you're working on a standard 9-5, 40 hour per week contract, but in the evenings or at the weekends, you're developing a software product or a website or something comparable, and you incur expenses in doing that or you make an investment in doing that- all of that will be treated as self-employed income. Not only will that not be subject to the expenses limit, but any sort of surplus expenses that you incur in relation to the IR35 court contract can be set against that income. Any money that you invest in order to pursue that business can be fully set against the profits of that business when they materialise."

One of the main areas of concern among these companies has been the limit of five per cent expenses, which could prevent development of other business streams or prevent investment in hardware, reinvestment or training.

When asked to justify this limit, Ms Walker said: "If somebody needs to buy an expensive PC or hardware in order to fulfill a contract - that contract is less likely to be caught by IR35. Contracts that are caught by IR35 are generally those that involve working on a client's premises and working on a client's equipment so when you are in that sort of situation, you won't get a deduction for buying an expensive PC at home anymore than an employee would because it is not necessary for that employment."

On the subject of competitiveness, it has been disputed by the Revenue that the small companies actually competed with the larger body-shops. However, the High Court heard considerable evidence this week to show that in many and diverse areas the small companies not only compete with the large body-shop, but in some cases tender and win the contracts. It appeared, at one point, that the court had accepted this as fact.

Ms Walker said: "I think what the judge was saying was that people who were equivalent to employees who met the employment test were not in competition with other businesses. There were people who genuinely would have been self-employed if they hadn't been working through a service company, who are the 'Charlotte' example. There will be some people there who, genuinely, would have been in competition with larger companies and they won't be caught by IR35, but those are people using service companies in competition with the larger companies. That is not the case that the PCG were putting, which is that everybody hit by IR35 is in competition with a bigger company and I don't think the judge accepted that."

"For example, Microsoft wrote a product that they went on to sell. Somebody doing that will not be affected by IR35.

"It's possible for someone to have two occupations at once, they can be employed in a day job and they can be setting up their own business in the evening. If you're literally employed in a day job, you don't get to set all of the expenses of your project you are working on in the evenings against the income from your day job and that's exactly what we're doing for IR35 people."

Another issue which has been a bone of contention between the PCG and the Revenue for the past year, is whether any or many contractors would leave the country as a result of IR35.

Ms Walker said: "We certainly wouldn't say 'nobody' is moving overseas. We've seen some suggestion that there are some people moving overseas but on the other hand we haven't seen evidence that these are substantial numbers. We certainly haven't heard any evidence either from clients or agencies that there is any effect on the overall market for contractors in the IT sector or in any other sector as a result of the large-scale movement of contractors overseas.

"Ministers have said repeatedly that 'There is no reason for people to move overseas, there is similar legislation in others countries which will make it just as unattractive to use a service company in other countries'. Overall, the tax system here is favourable to people working in this way compared to other countries. I've seen the 350 or so names on the PCG website's 'going away' list and I have seen what they have said.

"We don't have figures ourselves on leavers. I don't think it would be possible for anybody to identify numbers of people who had either left the country or come to this country or not come to this country purely because of IR35. People in IT move from one country to another very frequently anyway- there will have been thousands of people over the last year who would, whether IR35 had been in place or not, have decided for very good career or commercial reasons that they wanted to go and spend some time abroad.

"I think the Chairman of the PCG, Gareth Williams, has said that the rates of pay in Germany are very attractive and that is causing a lot of people to go and work in Germany, that's not to do with IR35, that's because there are good commercial opportunities there and that's always going to happen. I think it would be very difficult to identify a number of people who had gone abroad because of IR35."

Early on in the judicial review, the judge, who also sits on Employment Appeals Tribunals, signaled that he saw the case where someone taxed as an employee could have a case to claim benefits as an employee - and potentially an employee of a body-shop could have a claim for rights against the client. The Financial Times reported this could result in a 2 billion bill for British industry.

Ms Walker said: "I don't think the judge or the Financial Times was saying that that was as a result of IR35. Whether a worker can claim employment law rights against the person he's working for depends on the facts of the case - whether he, under employment law, will be counted as an employee. Our advice up until now has been that somebody with a service company that is clearly an employee of that service company can't claim employment law rights against his client. We've heard what the judge said, he is clearly an employment rights expert and will be taken seriously by the people who deal with these things. There may well be cases where people using service companies may try to claim employee benefits, but it is more a matter for the DTI as it would be tested in the courts under employment law.

"There is no suggestion in any case law, here or abroad, that somebody who is clearly an employee of a service company can claim rights against a client. If that were to be the case then people clearly would have the right to make those claims and it would be between them and their employers- on what basis those employers or those clients wanted to take them on, but really it is a matter between the worker and the client."

The PCG has long contended that the consultation process was a 'sham' considering it was invited in to a meeting to be told of the announcement which was due to be made the following day. Also the Revenue has stated, including in the court case that the PCG 'welcomed the revised IR35', when the PCG's press notice at the time described the move as replacing the 'unworkable with the illogical'.

She said: "The PCG wrote in as part of the process. They came to a meeting here at Somerset House and there were various conversations with representatives of the PCG. The PCG was certainly involved in our consultation.

"Their input contributed to Ministers' understanding of how the industry works and, as you know, there were changes that resulted from that consultation which were welcomed by the PCG.

"I don't think that the PCG have said that they didn't welcome them. I know they think they didn't go far enough and that's very clear but the PCG thought they were improvements and they said so in their evidence in the judicial review."

Although the outcome of the judicial review is unknown, Shout99 asked if the Revenue would be prepared to meet with the PCG after the court ruling.

Ms Walker said: "Ministers have said that they are not prepared to amend the legislation. Clearly we need to wait and see what the result of the judicial review is. The Revenue is prepared to talk to the PCG at any time and we have said that all along. It will be for Ministers whether they want to amend IR35 but at the moment their position is that they don't want to - they have defended it very strongly in the judicial review and elsewhere and they don't see any need for any amendment."

At one point in the hearing the PCG's QC, Mr. Barling, held up a contract that received two opposing replies after a 5 month wait, when there is a supposed 28 day turnaround, from the IR35 contract reviews department. Despite the time delay, one of the decisions was within IR35 and one was outside - despite the fact that they were the same contract. It was also apparent that the contract which the IR had deemed to fall within IR35 had been judged on a 'cut and paste' reply where the actual submitted contract had not been considered.

The Revenue's QC, Dr Richard Plender apologised for the situation.

Ms Walker explained: "It was a mistake - we're dealing with thousands of pieces of post everyday and clearly mistakes happen. We have apologised for that. What happened was that the case came in and was inadvertently copied and sent to two different offices, and those offices looking at a contract that was clearly one that was written deliberately to be ambiguous, the people at the time looked at it and gave different answers.

"We keep the procedures under review all the time and we try and make sure that they are working properly. People may be uncertain as to whether they will be caught or not. The Revenue has provided a service of giving opinions to give people certainty so if they have submitted a contract for an opinion- we've given an opinion- that will be binding on us, they should no longer be uncertain."

The only clear 'justification' for IR35 goes back to the Revenue's original 35th press notice which outline a desire to prevent to so-called Friday to Monday scenario, whereby an 'employee' quit his job on a Friday and continued the same 'job' on a Monday, but this time in a self-employed or limited company status. However, the IR35 legislation, in its finished version would not have prevented this perceived 'abuse' anyway.

Ms Walker said: "Some people have tried to say that 'where somebody who leaves an employer and comes back to the same employer straight away through a service company- that's avoidance', but 'if they leave one employer who goes back and does an identical job with the employer next door, that's not tax avoidance'- that doesn't seem to me to be a valid distinction. It doesn't seem to make a lot of sense to Ministers and I don't think that's something we could have legislated for.

"What we've done, and I think this is something that the judge recognised, is to look at anybody who using the existing common law test to identify an employee, would fall clearly within that definition if it hadn't been for the fact that they were using a limited company. All those people will pay tax on the same basis as employees who are directly employed."

And as to the future, if the Revenue where to lose the judicial review?

"If we lose the case, it will depend on the terms of the judgment. If the effect of the judgment is that the scope of European Law is so much wider than we were expecting it to be- that it prevents the Government from taking this kind of action, then I think we would expect to appeal- but clearly it depends on the terms of the judgment.

"We're just as confident as we were before the case, we and Ministers are confident that this is fair and proportionate and consistent with all of our European obligations."

Richard Powell, Shout99

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Revenue's IR35 architect expla... Richard Powell - 22/03
    Still no ackowledgement... Ian Goddard - 23/03
       why we run Ltd companies marlowa - 23/03
    28 days turn around target Austen - 23/03
       more drivel please..! marlowa - 23/03
    IR defines a 'real business' terry1 - 23/03
       the small-print marlowa - 23/03
          You can deduct certain expense... JeremyB - 28/03
    What a comedian CokeCain - 23/03
       Night-time hobbies disillusioned - 23/03
          conflict of interest with clie... marlowa - 23/03
             doing 2 jobs at the same time ... silly contractor - 23/03
                ARE THERE ANY VESTED COMMERCIA... Hansel - 23/03
                   vested interests - of course michaeldean - 26/03
                   vested interests - of course michaeldean - 26/03
                   vested interests - of course michaeldean - 26/03
          Expensive PC? hoekstra - 25/03
       More fixed price comments WestOzzie - 26/03
          T&M contracts Wiseman - 27/03
          Call-Off Contracts Wiseman - 27/03
    Hitler would have been proud Gay Bishop - 23/03
       its too late for pensioners marlowa - 23/03
    Financial Risk moose - 23/03
       This should be available as ev... marcw - 23/03
          Don't worry moose - 23/03
       is a joke chrisphilp - 23/03
          Politics of Envy bunyanjo - 24/03
       Good Point Macronencer - 27/03
    Makes me laugh (or cry) Loneranger - 23/03
       afore-ye-go... marlowa - 23/03
    Unaffected? Pog - 23/03
    Risky business CokeCain - 23/03
    Red mist JonAxtell - 23/03
    I am speachless. Hansel - 23/03
       Re: I am speachless. hoekstra - 25/03
       Working Time WestOzzie - 26/03
    BREAKFAST WITH FROST Chivers - 23/03
       Breakfast with Frost markcain - 23/03
          PANELLISTS Chivers - 23/03
    Employers National Insurance jinx - 23/03
       exactly apb - 23/03
       ERNI and the 5%allowance civil - 23/03
          Not so chrisphilp - 23/03
             legitimate arguments civil - 24/03
          Another unfairness sterling - 26/03
    IR35 Architect Article. bzf - 23/03
       Sign now and we will check you... sjoshi - 23/03
          because they can. marlowa - 23/03
    Inventing a product WEBBCH - 23/03
       products and services marlowa - 23/03
    Complete new interpretation quist - 23/03
       Please spout more drivel marlowa - 23/03
    We are convinced we are right ... pjb - 23/03
    this woman dis_grunted - 23/03
       Re: this woman marlowa - 23/03
          Sarah is actually quite a nice... jacob - 23/03
             i also heard dis_grunted - 23/03
                All I'm saying is.. jacob - 23/03
                   jacob dis_grunted - 23/03
                      I'm not starting either jacob - 23/03
                         Quite Right ! wintermuteltd - 25/03
                            "Those People" rich-mem - 25/03
                               Fair Enough. wintermuteltd - 25/03
                                  it is not my job dis_grunted - 26/03
                         please stop now dis_grunted - 26/03
                   Sarah's good side Gay Bishop - 23/03
                      NL arrogance I_am_who_I_am - 24/03
                         Governing people aharcourt - 26/03
    Lawyers, Footballers etc mattw - 23/03
       Specificity again (yawn) marlowa - 23/03
          more complex than it looks chrisphilp - 23/03
          So hang on a minute ... Rayz - 25/03
       Footballers marcw - 23/03
       Lawyers pipeman - 23/03
    I give you 'The Prawn Collecti... jon-nt - 23/03
       That's why the IR like it wool... geezerbloke - 23/03
       i agree dis_grunted - 23/03
       Re; I give you 'The Prawn Coll... spaceman - 23/03
          Collecting prawns marcw - 23/03
             re: Collecting prawns trashcanman - 23/03
             Prawn Collective spaceman - 24/03
                IR Manpower squeezer - 31/03
             Re: Collecting Prawns castillo - 26/03
       Good Call - Already on it! Pog - 23/03
       PCG The new 'Daddy' on the Blo... JPB - 23/03
          any thoughts, only one dis_grunted - 23/03
             What's complicated JPB - 23/03
       but - closed companies chrisphilp - 23/03
       sham WEBBCH - 23/03
    Whole picture or contract-by-c... moose - 23/03
       A little light relief stingo - 23/03
    Did she not hear the Judge? Network Consultant - 23/03
       Arrogance Gay Bishop - 23/03
       pressurising the judge? chrisphilp - 23/03
    Unbelievable! tightrope - 23/03
       very good post chrisphilp - 24/03
          Pensions - the second biggest ... I_am_who_I_am - 24/03
             I did ... bunyanjo - 24/03
    Oh bless .... Rayz - 24/03
       What about others civil - 24/03
          Agree but... CokeCain - 24/03
          does any one know dis_grunted - 26/03
       Can we trust the Establishment... Stu Moore - 24/03
          not the judge's fault really..... Rayz - 25/03
       Re: Oh bless .... hoekstra - 25/03
          Legal Right Bed Hopper - 25/03
             not quite dis_grunted - 26/03
    Wanton Confusion adrian - 24/03
       A fairer tax system Tommy - 29/03
    Do you yahoo? TCSLtd - 25/03
    Lowest of the low zardoz - 25/03
       This is even worse than IR35 .... Rayz - 26/03
    M/s Walker's Interview Dave Page - 25/03
    Paying Family disillusioned - 26/03
    Cloudy? Clearly not! WestOzzie - 26/03
    My Own Tools WestOzzie - 26/03
       Tools The Lone Gunman - 26/03
          skills'n'tools realist - 26/03
             Introducing .. the knowledge w... Rayz - 26/03
                exactly!! realist - 26/03
                Explore this idea a bit furthe... Wiseman - 26/03
                   I wonder ..... Rayz - 26/03
                      process as product Wiseman - 26/03
                         *I* know you're right .... Rayz - 26/03
                            Weighty matters Wiseman - 26/03
                   On second thoughts ... Rayz - 26/03
                TOOLS? Shagged - 26/03
                I've got it ..... WestOzzie - 26/03
                tools n' products tyler - 27/03
                   they have no understanding dis_grunted - 27/03
    Mischievous Thoughts... Pog - 26/03
       No. Rayz - 26/03
          Sarah Walker Exit Stage Right ... pjjaad - 26/03
             it should be dis_grunted - 26/03
                Ah point taken pjjaad - 26/03
             Only a temporary move nimrie - 29/03
                Well if She finishes pjjaad - 29/03
    a sad response from Sarah michaeldean - 26/03
       and that my friend dis_grunted - 26/03
    Fair? flotsam - 26/03
    Creating Value Macronencer - 27/03
    Expensive computers at home John Alt2 - 28/03
       christ almighty dis_grunted - 28/03

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