Once upon a time there was a government that was concerned about computer consultants who provided their services to end users via their own limited company, thus allowing them to avoid national insurance by taking dividends from the company rather than salary.
So concerned was the government that it legislated for a legal fiction. The infamous IR35 allows HM Revenue & Customs to ‘look through the corporate veil’ where the services of a specific individual were provided through the medium of a service company. Rumour has always had it that IR35 was aimed solely, or at least primarily, at computer consultants, and certainly the majority of cases taken, mostly with spectacularly poor outcomes, by HMRC have featured this category of taxpayer. And of course, in a slightly different context, it was a computer consultant who came under attack in the famous Arctic Systems case, which HMRC again ultimately lost.
One can only assume that if it was felt necessary to specifically legislate on the issue that this was a subject about which the government felt strongly. And, indeed, despite heavy criticism, IR35 remains on the statute book, and thus presumably still part of the arsenal of anti-avoidance weaponry deemed necessary by HMRC and the government in 2012.
So what are we to make of the series of recent disclosures in Private Eye about government consultants operating through, you guessed it, personal service companies. A slight variation on that theme is contained in today’s BBC News website article about local government (www.bbc.co.uk/news/uk-politics-17339374). Clearly, in these straitened times, both Whitehall and local councils have come to appreciate and value the national insurance savings available from using a personal service company.
But there are a couple of issues here that merit further consideration. One is the nature of the circumstances in which IR35 is intended to apply. HMRC guidance and the legislation itself make it clear that IR35 is applicable where a service company is inserted into the middle of a working and contractual relationship that would otherwise be an employment, and operates effectively by deeming the consultant to be an employee of the service company.
Now I for one, and I suspect tax practitioners in general, always advise clients that, if the services of a particular individual are required under a contractual relationship, that contract is a service contract (or, if relevant, a contract to which IR35 applies) and that the underlying nature of that contract is thus an employment. Any attempt in such circumstances to pass the relationship off as an employment is thus wide open to HMRC challenge as an employment or as a case to which IR35 applies. I tend to say “if you have to have the services of a specific person, the contract is one of employment, and you should treat the relationship as such.”
Given that the consultants who are using personal service companies appear by and large to be highly paid (which is presumably why the savings are particularly worthwhile), it does not seem to be too much of a logical stretch to assume that their individual services are particularly valuable and their skills particularly unusual or unique. That being the case, would their circumstances not be particularly susceptible to the application of IR35, if that legislation was being applied in a fair and consistent manner by HMRC?
So one of two things is happening here. One possibility is that IR35 is indeed being applied by HMRC in the case of all of the senior government consultants who are operating under personal service contracts (after all, individual taxpayers’ tax affairs are confidential, so this would not be a matter of public record). However, I suggest that a moment’s consideration suggests that this is highly unlikely to be the case in practice.
Rudyard Kipling described power without responsibility as “the prerogative of the harlot throughout the ages”, a phrase taken up by politicians such as Stanley Baldwin in describing the workings of the British press (how very timely and apposite in the light of today’s arrests!) The operation of IR35 places the consultant who owns the relevant service company in the precisely opposite position, as he or she is deemed for tax purposes to be an employee of the company, but has none of the legal protection that an actual employment would provide in the event of unfair dismissal, discrimination etc. Thus it beggars belief to think that such highly skilled and marketable individuals would accept such a situation in their dealings with a client, even if that client is part of the machinery of national or local government.
I therefore think it is reasonable to draw the conclusion that IR35 is not being applied in these cases, which rather begs the question “why not?” It is rather difficult to believe that the Treasury is blissfully unaware of the use of personal service companies by consultants in other government departments, always assuming tbat it is not engaged in the same practice itself, and thus HMRC could hardly claim that it has no way of knowing that the practice is going on so close to home.
If HMRC chooses not to apply the rigour of the law in such cases, which appear to clearly fall within the terms of IR35, what is the taxpayer who finds him or herself under attack from HMRC using that legislation to think? There may famously be no equity in tax, but such a flagrant disregard of the tas law in a particular set of cases is surely conduct likely to bring the law into disrepute.
Thus the government finds itself wide open to a charge of clear hypocrisy in this respect. Its way forward is clear; if it does not wish HMRC to apply the full rigour of IR35 in the case of government consultants then the legislation has no place on the statute book, and should be repealed at the earliest possible opportunity. Given that there is a Budget next week, that opportunity occurs early indeed! So why am I not holding my breath?