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Beware HMRC Attacks on Employment Status

TWEd worries that the new government proposals for forcing high-earning contractors onto the payroll will have unwelcome broader consequences.

Well, I hope this editorial finds readers well rested and in suitably convivial mood after the Jubilee Weekend.

The last week has of course been eventful from a tax perspective as well: first we had the climb down on the "pasty tax" and VAT on caravans - at least in part - ( "Pasty Tax": Government Climbs Down on VAT Proposals - But is it Enough? ) and then we had further welcome news in the form of charitable donations ( Chancellor's Change of Heart on Proposed Cap on Tax Relief for Charitable Donations - More Work Needed ).

Whilst it may be easy to colour these changes simplistically as "u-turns" it is, I think, important to recognise that these were in fact proposals subject to consultation and that, at least to an extent, subsequent input from external parties has been seriously considered. Having said that, it is difficult to see how some aspects of these proposals got to see the light of day. And some issues remain, such as the withdrawal of Age Allowance, and the more general cap on tax reliefs for things such as losses and interest payments. I shall be surprised if we don't hear more on these, over the coming weeks and months.

HM Revenue & Customs (HMRC) also issued a consultation on the taxation of "controlling persons" and intends to require such individuals to be subject to payroll taxes, regardless of the legal nature of the contract between the parties involved. It would be easy to shrug this off and say that, if HMRC had policed the original IR35 effectively (or perhaps if the legislation had been better constructed in the first place) then these new proposals would not be necessary. In fact these proposals echo the original "personal service company" proposals before they became IR35.

But I do not like them, because they divorce taxation from legality. That is not new but it is relatively rare, and applied ...judiciously. Under these new proposals, HMRC will be able to get all the tax and social security contributions it wants but in broad terms the quasi-employee will have no guarantee of the normal protections associated with employment. Of course there is no direct link between taxation and employment rights but one has gone hand in hand with the other for decades.

Let's not forget that HMRC / HM Treasury tried something similar under the guise of so-called "False Self-Employment in Construction" in 2009. Given the number of times - and how badly - HMRC had lost on the issue of employment status in construction (such as Castle Construction) it smacked very much of toys being forcefully ejected from perambulators, such that HMRC could ignore the courts and tax on its own terms. The new proposals in relation to controlling persons may start off narrower in application, but they do feel very much like the thin end of the same wedge. On that basis they should be scrutinised and challenged, where appropriate.

Back to the party spirit, welcome to Abbey Tax Protection for their article on the Alternative Dispute Resolution Pilot and to Ward Williams for their article on the Patent Box - a Shining Opportunity. And lastly, I'd like to add my own congratulations to Mark's last week, to the Low Incomes Tax Reform Group for their well-deserved recognition at the LexisNexis Taxation awards. An excuse to charge one's glass, for one last time...

Regards all,

TWed