Imagine the scene. The England football squad have carefully worked together on a game plan with caretaker manager Stuart Pearce. They’re on the pitch, the match has started and an opportunity opens up for the game plan to kick in.
Theo Walcott passes to Steven Gerrard, who avoids a tackle and makes a clean pass to Fraizer Campbell. This is it: Campbell knows exactly what he needs to do. As he flies towards the goal, the ball at his feet, he ignores the warning shouts of his team-mates, because he’s following the game plan to the letter. He lines things up, kicks perfectly, and scores!
It’s only when he sees the ball at the back of his own net that he realises his awful mistake. His team-mates were trying to tell him he was headed the wrong way.
Fanciful? Maybe. But it’s a good illustration of what’s happening on the IR35 Forum right now with the new business entity tests. HMRC’s obsession with sticking to the game plan of finding people who are supposedly ‘disguised employees', whilst failing to listen to other members of the Forum, will almost certainly lead to the taxman scoring an own goal.
The ‘disguised’ concept is ludicrous, as ContractorCalculator showed with its April Fool’s Day hoax about 'disguised businesses'. And it leads to bizarre behaviour, like contractors having to ensure they provide a substitute during a contract, even when it’s unnecessary for project completion; or other contractors not buying their coffee at the staff canteen, because that’s a facility provided for employees. It’s not only ridiculous, but also a denial of the fact that work patterns are changing worldwide, as discussed from a US viewpoint in a recent Forbes article.
Whether it’s an employee signing a contract of service with an employer, or a contractor signing a contract for services with a client, the point is that both parties have agreed and willingly entered into the contracts. Sometimes similar jobs are being done and, despite the case law, it can be difficult to distinguish between the two scenarios without looking at the contracts. But we should be free to agree terms with others without interference; it’s certainly not the job of HMRC to say that we can’t.
But HMRC is in a fix, and it’s all down to the fact that governments use National Insurance Contributions (NICs) as a way to ‘disguise’ the fact that they’re increasing taxes. If income tax and NICs were merged, as proposed in our IR35 white paper [PDF] last year, HMRC could stop tying itself in knots going after trading vehicles and people it has to pretend are ‘disguised’.
The new business entity tests proposed by the IR35 Forum are potentially an unhelpful layer of complexity on top of an already over-complex system. And with the scores and weightings proposed by HMRC likely to show that the majority of limited company contractors are ‘at risk’, HMRC will simply end up having to review far more cases of genuine contractors than it can possibly handle. That will create a lot more costly administration with little or no return on investment, plus unfairly target responsible contractors – hardly the ‘better administration of IR35’ that the Forum was set up to introduce.
But it doesn’t have to be like that. By listening to its IR35 Forum team-mates now, HMRC has a great opportunity to look again at its scoring tactics and game plan, and to avoid scoring a game-losing own goal.