Forum Archive Index - July 2000

["malcolm coleman" <malcolmcoleman@hotmail.com>]

Check out the toughening up on contractors..

The Continuing Crackdown on the Self-Employed

by Lorna Bourke
Personal Finance Columnist 6/7/2000 7:16

You can run from the tax man, but you cannot hide.

In the latest round of its crackdown on contract workers who avoid tax and 
National Insurance contributions through the use of service companies or 
partnerships, the Inland Revenue sets out its position in its latest Tax 
Bulletin Number 47, which provides a comprehensive round up of how the new 
rules take effect.

The bulletin is designed to bring together and clarify the position for the 
many thousands of workers who are affected by the Treasury's Budget 
clampdown on what is, in effect, a National Insurance and tax avoidance 
scheme. Workers who use service companies can pay themselves dividends (on 
which no NI contributions are levied) and they can leave money in the 
company, paying Corporation Tax at only 10% to 32.5% instead of income tax 
at 40%.

In his Budget speech the Chancellor set out his intentions, summarised in 
leaflet IR35, to clamp down on this abuse in situations where, if it were 
not for the service company or partnership, the individual would effectively 
be employed by the firm or client for whom he or she works.

The new tough rules are designed to attack the growing numbers of workers in 
the IT industry who have used service companies to minimise tax and NI 
contributions, but many other workers are potentially affected.

The Revenue has said that it will be reviewing all contracts between clients 
and service companies owned by a contract worker, and contracts between the 
worker and the service company and it will include past contracts. Simply 
changing the wording of new contracts may not be sufficient to avoid being 
reclassified as employed.

Where no contracts exist, or the contracts are oral, the Revenue has said 
that Inspectors may talk to both the individual worker and the client 
company and will want some evidence that the terms and conditions are as 
stated to the Revenue. The Revenue has also made it clear that it has not 
approved a 'model' contract and that each taxpayer's arrangements will be 
reviewed individually.

One of the crucial differences between employment and self-employment is 
whether the individual can appoint a substitute. The Revenue has said that 
it will be checking on any rights of substitution written into a contract to 
make sure they are genuine rights and are not just cosmetic, designed to 
circumvent the new rules.

Many workers using service companies are believed to be adopting a "wait and 
see" approach. In the event that the Revenue finally rules that they are 
actually self-employed, the full amount of NI contributions and unpaid tax 
will be collected. In cases of negligence or fraud penalties can also be 
imposed.

Employers who use contract workers operating through service companies are 
likely to be co-operative in providing new contracts which make it plain the 
worker is self-employed. If they do not, they will find themselves with 
employees entitled to full holiday pay, sick pay, pensions and other 
benefits which could increase their labour costs considerably, as well as 
making them liable for redundancy payments.

Contract workers using offshore service companies are likely to be caught, 
too, as the Revenue has indicated that it will "look through" these 
arrangements and if the individual would otherwise be an employee of the 
client, then they will be taxed as employees regardless of the offshore 
status of the service company. The Revenue has powers to demand details of 
all payments made to offshore companies from the records of client companies 
and agencies.

Copies of the Inland Revenue Tax Bulletin 47 and the new leaflet IR175 can 
be obtained from Inland Revenue Enquiry Centres, Tax Offices, Inland Revenue 
National Insurance Offices and on its website



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