IR35 chat with the Inland Revenue

Sarah Walker, assistant director of the Inland Revenue's personal tax division, has been at the centre of the IR35 debate. She is the senior civil servant with prime responsibility for the change to contractors' taxes, and probably understands better than anyone who will be hit by the measure - and who will escape.

She has also been privy to the sometimes controversial negotiations with lobbyists such as contractor groups and tax experts, as a result of which the Revenue has made a series of adjustments - although not without accusations of bias towards big business and against the single-person company freelancers that will be hit by the changes.

Sarah_Walker "Ministers want people to pay tax according to the same rules whether or not they have service companies. As for employer NIC, they want the cost to the client and worker to be the same whether the worker is an employee or a contractor. The change to make the service co-liable for employer NIC was welcomed when it was announced in September.""Our rules only affect the tax and NIC people pay. The terms of people's contracts are not a matter for the Inland Revenue."

Rimmer says: "Waffle."

Quattro says: "The change was welcomed by who? The Labour government!"

Sarah_Walker says: "The change was welcomed by the PCG [Professional Contractors Group], among others."

Quattro says: "Lies. Some of the details were welcomed, not all."

Sarah_Walker says: "The PCG said they were glad that the clients would not be obliged to operate PAYE and pay NIC, so that they would be able to continue to work with people through service companies on a gross payment basis if they wanted to."

Quattro says: "The removal of the burden of certification was welcomed, not the liablity for the PSC to pay employers' NI."

Rimmer says: "I think the lie has to be nailed that we pay no tax - computing often gives that impression. We pay shedloads, with no job security, and will soon be paying loads more with no job security, end of story."

Jimmy says: "If you're worried about security in IT - that's a real concern, NOT!"

Rimmer says: "A bitter permie, what a surprise. Come here to gloat, have you?"

Jimmy says: "No, I'm a contractor. Correction - I was a contractor, but have turned permie for a senior position."

Rimmer says: "Permies, you should be worried. Labour's tinkering will screw up the whole IT industry. We'll soon be after your nice cushy permie job."

Quattro says: "Sarah, one question of importance. How many PSCs does the Inland Revenue use/employ?"

Sarah_Walker says: "Workers in the UK pay tax, either as employees or as self-employed. The rules for making the distinction are set out in the guidance. Ministers believe that people should not be able to avoid the application of the rules, simply by setting up a company."

Quattro says: "So how do Companies Pay Tax? As Companies. Do you propose making EDS pay full PAYE and NI on its workers! I suppose that's one way to reduce the cost of the FM Contract!"

Sarah_Walker says: "JAH - the rules distinguish between people in business, who can make profits, and those who meet the definition of an employee, who pay tax on their earnings. These rules apply to everyone else. Ministers think they should apply to people with service companies too."

Quattro says: "So the service company is not allowed to make a profit?"

lholden says: "What plans are there to review companies to ensure that they are complying with the new rules?"

John says: "But why should legitimate service companies have to justify their existense when no other type of business does?"

Sarah_Walker says: "It's up to companies to comply with the rules and pay the correct amount of tax and NICs. Normal Inland Revenue compliance activity will identify cases where the rules have not been followed."

John says: "Sorry, that didn't seem to answer any of the questions asked."

Quattro says: "But the company is being taxed as an individual. Are you not intending to use the individual's tax code in determining the PAYE due by the company?"

Sarah_Walker says: "The company is not being taxed as an individual. The legislation will ensure that the worker will pay the correct amount of tax and NIC, and the company will pay employer NIC."

Robert_VNUNET says: "Sarah, is it the intention of IR35 to drive contractors into permanent positions?"

Sarah_Walker says: "It is not the intention of Ministers to drive people into permanent employment. The intention is to make the choice between working as a service company, or as a direct employee neutral in tax and NIC terms."

TD says: "Won't the change drive contractors out of the country or to set up companies in other EEC countries where taxation is lower?"

Quattro says: "Is the tax due calculated on company income, with an application of personal tax free allowances?"

John says: "Then a PSC employee could end up paying more tax than wage (Yes/No)?"

Sarah_Walker says: "The guidance on contracts lasting more than one month is consistent with the law, as set out in the guidance paper."

Guest27954 says: "If neutrality is the objective, please clarify how the benefits of permanent employment will be treated."

Quattro says: "Sarah, the guidance is still 'woolly', as previously described by representative bodies, and regulations only arrive in March. Fair or not?"

Sarah_Walker says: "The distinction is not between a 'disguised employee' and someone trying to raise capital. It is between someone who is actually working on terms which would be employment, and someone in business who meets the self-employed definition."

Steve says: "Sarah, what NI funded benefits will I be entitled to as a director of a limited company between contracts?"

Sarah_Walker says: "The position on benefits is the same as for any employee. If you are unemployed (i.e. not employed by your service company) you can claim Job Seekers Allowance."

John says: "Re the worker paying the Tax. PSC employees could end up paying more - almost all - their wages in Tax (Yes/No)?"

Quattro says: "Directors who contructively dismiss their employees are ineligible for JSA!"

Steve says: "So should I sack myself between contracts? Won't that stop me from obtaining any benefit for six months?"

TD says: "If contractors don't use overseas companies, won't they just raise their rates?"

rimmer says: "Will we have to fire/rehire ourselves, then?"

Sarah_Walker says: "If you are not clear about the application of the guidance to your contract, you can ask us for a decision. The press release we issued on Monday explains how to do this: we are able now to give advice on existing contracts which go beyond 5 April. Details on our website."

Quattro says: "Sarah, these guidelines have changed very little since the first draft. What has been happening to them since then?"

Sarah_Walker says: "We discussed the guidelines with representative bodies, including accountancy bodies and contractors' representatives. But the law has not changed: the guidance explains the rules which apply to people with service comampanies. What we have done is try to make it relevant to typical contractor situations."

rimmer says: "I need a waffle translator."

Steve says: "Will the 'provisional' decision you give now be subject to change when you release proper regulations?"

Sarah_Walker says: "Provisional decisions on status will not change, as long as the facts do not change. The legislation will not affect those decisions, but it will provide a mechanism for appeals if people are not satisfied."

Guest27954 says: "Since we are to be treated no differently in future, can I have your job please?"

Quattro says: "You were advised by representative bodies of the remianing uncertainty, yet you have done nothing other than apply a draconian rule contract length. Yet previously contract length was dismissed as an indicator."

Steve says: "Sarah, does the IR know how many companies provide services and employ people who hold a significant but not a controlling interest?"

Sarah_Walker says: "The case law applies in the same way to IT workers as to everyone else. The courts have decided that working for a large number of different people during a year is an indication of self employment."

Quattro says: "Sarah, case law has determined that contract length is not an issue in SE cases. Your guidelines are inconsistent with this."

Sarah_Walker says: "The 'rule' on contract length is consistent with the guidance. It is meant to give more certainty - one of the main points made in the consultation."

Sarah_Walker says: "The relevant case law is the Lorimer case."

Quattro says: "Sarah, the rule on contract length is the guidance, and therefore cannot be consistent with it. It was all issued in one document."

John says: "This only gives certainty (alleged) of whether you are an employee or whether you are not."

Sarah_Walker says: "Even if we had said nothing in the document about standard contracts, the decisions would have been the same based on the rules set out in that paper."

Singh says: "Again, Sarah, you throw more confusion on this topic. You say guidance rules in a paper, yet it is still 'woolly'"

Quattro says: "So you seem to have rules, which are not clearly defined within the document, which you are withholding from general publication."

Singh says: "But you have not answered the question of a month contract followed by another. I truly believe that within the first two years, some contractors will let the IR take them to court and then the future direction of IR35 will be moulded, a bit like the Bosman ruling in football."

Sarah_Walker says: "The one month 'rule' applies to the length of the engagement. If there are a series of contracts covering the same engagement, they will be treated as a single engagement."

Steve says: "sarah, do you expect me to obtain and submit to you the contract between the agency and my end client? Your latest FAQ says that you will include this in your 'deliberations'"

John says: "Unanswered question: How can directors obtain benefit between contracts when disallowed due to sacking themselves?"

Sarah_Walker says: "All the terms of the contracts which govern the obligations of the worker can be relevant to a decision. It is unlikely that there will be rules in a contract which the worker hasn't seen which govern the way he works. But if there are, we would take them into account."

Steve says: "Sarah, you can't be serious! How can I be assessed on terms I have not seen, have not signed, and am not personally or legally bound to?"

TD says: "Surely, enforcing these regulations will cost more than the money gained from them. As Singh said, contractors will let you take them to court before paying."

John says: "I'll certainly go all the way to court!"

Quattro says: "You have hidden rules, disguised by guidance for individuals to interpret, and yet you are not prepared to publish your full rules. Which seems to apply to documents and not the full working relationship and background."

Singh says: "I'm inclined to agree with Quattro. Sarah, good luck to you and the IR. Remember what happened to the poll tax..."

Sarah_Walker says: "There are no unpublished rules. The guidance sets out the law as we understand it."

TD says: "The court will be flooded with cases to the point where nothing will be settled - we have a prime example with the Poll Tax."

Steve says: "sarah, are the guidelines based on detailed regulations?"

Quattro says: "Sarah, you have within this conversation reflected that the one month rule was emphasisied in the latest guidelines, but that you would have applied it anyway. What else will you apply without publication of the rule!"

TD says: "If you wish to get more tax out of the limited companies, then you should address Company taxes, not individual tax."

Singh says: "Sarah, can you give more details on this 'woolly' guidance? Leaving yourselves open to interpretation is a two-fold mistake. First, IR integrity will be questioned, and second, people will be more keen to avoid paying the extra NI and continue to operate as they are."

Ian says: "Hi Sarah, my question for you is: what are the guidelines that define a company that is not subject to IR35? I believe that I compete against a large IT consultancy which probably works on contract terms that are similar to my own. How many employees are required and/or what kind of structure is required?"

Sarah_Walker says: "The guidelines are based on case law, made by the courts, not regulations."

Steve says: "Sarah, if there are no regulations, and there will be no regulations, aren't you finished? What goes into the Finance Bill?"

Quattro says: "So how can the Revenue determine the SE status, since this is court based. Do you wish every assessment to go to court? After all, the very fact that we have different companies, contracts and working situations means that there is no parallel."

Guest 27954 says: "Can you explain why the proposal discriminates between Agencies, who are unaffected, and Contractors, who are?"

Sarah_Walker says: "The rules will apply, broadly, to companies where the worker is able to influence the amount and form of his income from the company - i.e. he can decide whether he takes money out as dividends or salary. The legislation will define this in terms of the size of shareholding etc."

Quattro says: "So this is not work which is performed 'personally', but only where the individual can determine his own renumeration."

Annem says: "Can you explain why, as an IR35 'employee', I will be worse off than a real employee as I will have to pay the employer's NI too?"

Sarah_Walker says: "There are a series of criteria. The work must be done personally in circumstances where the person would have been an employee. He has to be in position to influence the form of his renumeration, he then has to pay a minimum amount of tax and NICs."

Sarah_Walker says: "There will be regulations and Finance Bill legislation, but they will not deal with the question of whether somebody would have been employed or self employed. That will depend on case law, as it does for everyone who doesn't have a service company."

Singh says: "What about the role of other professions, i.e. doctors on short term contracts? It appears to be easier to do what a lot of contractors do - go to Europe, pay no tax there for nine months, do three months in the UK and give a little to the IR. What's your opinion?"

John says: "That could affect consultants in 50employee+ companies (re 5% share rule)."

Sarah_Walker says: "The rules apply to people using service companies in all occupations in exactly the same way. Nothing special about IT."

Quattro says: "After that reply, I again ask - SE tests determine the 'employed' or not. Yet, over and above this is the right to renumeration."

Singh says: "What about split share capital? Shareholders can dispute that the dividend declared should be before NIC on the company's gross. How do you aim to tackle this?"

Steve says: "Sarah, you said there are no regulations. Now that there will be regulations and legislation, how can you produce definitive guidance at present?"

Singh says: "Steve, she can't."

rimmer says: "Don't you think by nature of all these uncertainties, IR35 should be reconsidered after proper consultation with contractors?"

KKK says: "If a contractor chooses the option of employment and is subject to NI and Tax contributions, what happens if the contractor loses the contract? Will the government accept the contractor to now be 'unemployed'? Will the government then pay unemployment benefits to the contractor?"

Sarah_Walker says: "Employer's NIC (again): Ministers want the cost to client and worker to be the same whether there is a service co or not. The responses to consultation showed that people didn't want the client to have to pay, so the service company will pay. Eligibility for benefits is a matter for the DS, but the rules are exactly the same for service co workers as for everyone else: if they are unemployed, they can claim benefit."

TD says: "What happens in the case of a spouse owning the company and you not taking a salary or a dividend?"

Steve says: "Sarah, as an affected company, why was I not consulted?"

Singh says: "Also, the question insurance. If I'm taken ill during a contract and then claim loss of earnings, despite paying insurance tax, I suppose you would want a slice of the compensation claim. True or false?"

TD says: "How do you propose to collect this tax - agent, contract or employer? If agent, they will have staffing problems. If contractor, they will avoid it. If employer, that again is unfair."

Sarah_Walker says: "Tax and NIC will be paid by the service co - by deducting tax and employee NIC from salary and paying employer NIC direct. If the service company does not comply, we could collect the tax due from the workers instead."

John says: "No. They can?t if they make themselves unemployed !!!!!!!!!!!"

Quattro says: "Everyone, you saw it. She said SALARY not INCOME."

Sarah_Walker says: "Yes deduct from salary paid by service co to worker."

Quattro says: "SALARY to the Individual, not INCOME to the COMPANY. Sarah, even you get confused, so how can we cope?"

Annem says: "But the service company pays the employer's bit too, so if a single employee company pays more, I don't understand why I should be worse off. I don't want to run a company, the agencies insist."

rimmer says: "So I can make myself redundant, then re-hire myself?"

Singh says: "After 5th April."

Quattro says: "When will the final regulations be available for public scrutiny?"

Sarah_Walker says: "We hope to be able to publish Regulations in draft later in February. But the main details of the rules are already available on our website."

Quattro says: "Draft is not a good climate for business."

Steve says: "If the regulations are in draft, will they change? Will this in turn affect the guidelines?"

Sarah_Walker says: "Regulations are in draft until approved by Parliament."

Steve says: "And the answer is?"

Steve says: "Sarah, has the IR consulted with the DSS on this matter? Or customs and excise re VAT?"

Sarah_Walker says: "We have worked closely with all affected departments including Customs and DSS."

rimmer says: "I suppose if IR35 doesn't get in now, the Conservative government in two years' time would kick it into touch anyway."

sideshowbob says: "Oh, come on, rimmer. Plaid Cymru are more likely to be in power in two years' time than the Tories."

Singh says: "Sarah, what internal problems have the IR identified with regard to the implementation, administration and collection of the additional tax resulting from IR35? Will it not be a drain on your resources?"

Sarah_Walker says: "We don't see any problems in implementing this. What we are trying to do is to make it as easy as possible for taxpayers to comply with the law as it applies to them."

Annem says: "I thougth we had to pay 95 per cent of INVOICE as SALARY?"

Quattro says: "Annem, take it slowly. That is a determination in Company Law."

Sarah_Walker says: "The service co will be treated as having paid 95 per cent of income from relevant contracts as salary (less other deductions). The tax and employer NIC due will be deducted from this."

Quattro says: "Sarah, new subject. How many weeks training do you receive as an Employee of the IR? Do you pay Tax on this? Why are you different from me in this respect?"

Sarah_Walker says: "I get no tax relief on training, I pay for myself. The rules for service companies will be the same."

Steve says: "Sarah, define a 'significant investment' in training."

Guest88291 says: "Sarah, have you considered taking up politics? Your answers are very Alistair Campbellish!"

rimmer says: "Perhaps it's a pseudonym!"

Quattro says: "Sarah, are you determining in law the minimum salary which must be 'deemed' to be paid by the separate legal entity 'Company X'?"

Singh says: "This chat has confirmed my belief that the IR35 is still very subjective and as such will result in several workarounds, which the IR will just have to chase after."

Steve says: "Sarah, what about training that the IR, your employer, pays for?"

Quattro says: "Sarah, did you pay tax on that training?"

Sarah_Walker says: "No."

Annem says: "Does your 'company' get tax relief on training it pays for?"

John says: "Why should we!"

Quattro says: "No to training?"

Quattro says: "Sarah, who pays for the CBT training available on your network? Do you pay tax to learn Excel?"

Steve says: "Sarah, have you ever received any training from the IR? Did you pay tax on that training?"

John says: "She has already said she has not paid Tax on training received from IR."

Quattro says: "No, she did not. She answered no, but did not give the context of the question. Sarah, please answer fully."

Annem says: "But have the IR paid tax on training?"

Singh says: "Sarah, with less than 60 days to go, you have not defined your hard and fast rules, so I find it hard to believe you have not identified any problems with the implementation and administration."

JAH2 says: "I don't think that the government should be able to decide arbitrarily that my salary should be 95 per cent of the income it receives. When are you going to start deciding the renumeration of directors of larger companies?"

rimmer says: "Large companies have got MP directors!"

JAH2 says: "You've got a point, rimmer. If two companies turn over 100K, why should one director be able to pay the minimum wages and a divi of 90K, and another have to pay a slaary of 90K + and no divi?"

TD says: "No company pays 95 per cent of invoices in salary, so why should a contractor?"

Steve says: "Sarah, are you going to amend company law to remove the right of a director to set their level of renumeration?"

Sarah_Walker says: "Thanks for letting me do this. I hope you have found it helpful. Please look at our website (www.inlandrevenue.gov.uk/ir35) for more details, especially if you want advice on a current contract, and whether the rules would apply to it. The website tells you how to contact us."

***Sarah_Walker has left the room

Quattro says: "Coward."