Stephen J. Dann
~ ITPA ~
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.
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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.
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It now seems 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
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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 "
The Inland Revenue case against Geoff and Diana Jones has resulted in a landmark win for the contractor in those instances where husband and wife are both shareholders and it is clear the Inland Revenue are now obliged to allow income earned by one shareholder to be split between husband and wife through payment of dividends. The determination 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.
To engage my services, or for further information please contact me by e-mail
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