Stephen J.
Dann
~ ATT ~
UK Tax Advisor
IR35
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The term IR35 refers to the
Inland Revenue's explanation of legislation
contained in Schedule 12 of the 2000 Finance Act, which
was introduced so that
people who would otherwise be hired as employees, but who
instead provide
services via their own service companies, are deemed to
be directly employed.
This way, they are obliged to
calculate PAYE (Income Tax and National
Insurance Contributions)on their income in the same
manner as would be the
case if they were directly employed.
Those with legitimate businesses, where they are able to employ or substitute others to complete the work,who advertise their services, carry their own insurance cover, and accept an element of risk in conducting their business, will not suffer the detrimental consequences of IR35. It is those who try, artificially, to create the illusion of such a venture to whom this legislation applies.
Various schemes have been
devised to circumvent IR35 and Schedule 12, but in
time most seem certain to fail, including those schemes
which involve the use
of an offshore company as indicated in the following
extract from the Inland
Revenue website, and confirmed by the Professional
Contractors Group.
..............................................................................
Can I avoid the legislation by using an offshore
service company?
No. If you would have been
liable to UK tax and NICs had you been employed
directly
by the client, you must pay UK tax and NICs under these
rules, whether or not
your service company is located in the UK.
If an offshore company fails to
deduct and account for PAYE tax and NICs under
the legislation, liability to pay tax and NICs can be
transferred to you.
Action to recover employer's NICs not paid by an offshore
company could also
include action against any assets of that company located
in the UK.
The Inland Revenue have powers
to obtain details of payments to offshore
companies from the records of clients and agencies. It is
also clear that the Inland Revenue are making enquiries
into such schemes.
Inland
Revenue enquiry letter
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It is clear that offshore schemes, involving the Isle
of Man especially,
and frequently endorsed by an unknown barrister, are
being marketed
in much the same way as were Timeshare apartments some
years ago.
Every such scheme I have seen makes false claims and
statements, and frequently
they rely upon the contractor signing a confidentiality
agreement in order
to prevent him/her obtaining an independant opinion. If
you have been introduced
to one of these schemes I recommend you read the PCG
advice below.
To view the website for Tax Barristers in London
chambers click HERE
..............................................................................
The Professional Contractors Group, on their own website, clearly state:
"There are also schemes that
usually involve offshore arrangements. We
haven't seen one yet that we believe to be watertight.
Few offer any
guarantees against future challenges by the Revenue and,
invariably it will be
the contractor who suffers if the arrangements are
challenged by the Revenue.
There are also rules about transactions performed purely
for the avoidance of
tax that could allow the Revenue to disregard the
transaction. Most Schemes
would appear to fall foul of these. Tax avoidance schemes
using umbrella companies will fail if the contractor is
receiving most of the income in a form
not subject to PAYE or NI "
Additionally the Inland Revenue case against Geoff and
Diana Jones has resulted in a landmark win for the Inland
Revenue in those instances where husband and wife are
both shareholders and it is clear the Inland Revenue are
not prepared to allow income earned by one shareholder to
be split between husband and wife through payment of
dividends. The PCG's observations can be viewed HERE
The complete PCG site can be
viewed here PCG
Link page.
Those who are currently working through overseas service
companies should be
under no illusions. Even the PCG accept they are probably
committing an
offence. Such contractors may already be incurring
interest, plus penalties
equivalent to 100% of the unpaid tax and NIC.
For individuals in this position
I recommend an urgent consultation to
discuss the options available which may require
negotiating a fresh contract
supported by an indemnity insurance as described on my
links page.
Please also read my HOME page for details of my
no-commission policy
on such insurances. I rely entirely upon my professional
fees
and do not recommend insurances or investments in order
to obtain commission.
In their above article, the PCG clearly
state:
"There are also rules about
transactions performed solely for the avoidance
of tax that could allow the Revenue to disregard the
transaction. Most Schemes
would appear to fall foul of these"
This is a direct reference to
Case Law which the Inland Revenue have at their
disposal, in addition to the IR35 regulations, in the
form of Ramsay (WT) Ltd.
v Commissioners of Inland Revenue (1982) which was
further defined in Furniss v Dawson.
These two cases provided the
Inland Revenue with the ability to examine a
series of transactions to ascertain whether an artificial
step had been
inserted, having no commercial value, but with the sole
outcome of mitigating
a taxation liability. If the following four conditions
are met then an
arrangement will fall foul of the Ramsay doctrine and any
artificial steps can
be ignored by the Inland Revenue in determining an
individual's taxation liability:
i) That the series of
transactions must be pre-ordained to provide a given
result;
ii) That there is no purpose other than tax
mitigation;
iii) That there was no practical likelihood that the
events would not take
place as planned;
iv) That the events did take place.
If you have been shown a scheme
which contains elements which have no commercial
purpose
then it almost certainly falls foul of these
conditions.
Ramsay
(WT) Ltd. v CIR (1982) tax case in detail.
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