When the Government introduced IR35 over 10 years ago it changed the face of contracting in the UK, suddenly there was a divide –those who were inside and considered by HMR&C to be deemed employee and those who were outside and considered to be in business on their own account.
HMRC Amend IR35 Legislation
HMR&C requirements for compliance with this legislation have changed over the years but in December 2012, for the first time, they have amended the legislation itself. The changes mean that a contractor who would be considered to be an office holder of the client if they had been recruited directly rather than working through a PSC (or single person Limited Company) will now fall inside IR35 and will be required to draw payment from their company through PAYE rather than drawing dividends. ‘Office holders’ will include anyone who manages a team or plays a key financial role in an organisation.
Industry specialists, Lawspeed, commented on the changes and concluded that ‘far from being a victory for contractors this appears to be a major strike by the Government against personal service contractors’.
In our opinion, HMR&C have purposely widened the scope of the legislation to include any contractor who is temporarily recruited to fill a management position in a company that would otherwise be covered by a permanent member of staff. Therefore, it could be argued that the only contractors who will be genuinely outside scope of the amended legislation would be those recruited for a specific project. Any contracting position that fills a role that existed within the company before and after would put the contractor inside IR35.
HMR&C define an office holder as a “permanent, substantive position which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders”. They substantiate this with case law – in Edwards v Clinch Buckley LJ stated:
“An office in this context is, in my opinion, a post which can be recognised as existing, whether it be occupied for the time being or vacant, and which, if occupied, does not owe its existence in any way to the identity of the incumbent or his appointment to the post. It follows, I think, that the office must owe its existence to some constituent instrument, whether it be a charter, statute, declaration of trust, contract (other than a contract of personal service) or instrument of some other kind. It also follows, in my view, that the office must have a sufficient degree of continuity to admit of its being held by successive incumbents: it need not be capable of permanent or prolonged or indefinite existence, but it cannot be limited to the tenure of one man, for if it were so it would lack that independent existence which to my mind the word “office” imports. It may be that it should in some degree possess a public character, but it is not necessary to decide that point in this case, for the taxpayer’s functions in respect of which fees were received undoubtedly had such a character.”
Obviously future test cases will bring clarity to the changes but it would appear that the repercussions could be far more serious that we initially supposed.
It appears that as the legislation evolves contractors working through their own limited companies are becoming at more risk through no fault of their own. In order to help assist with this minefield, we are putting together a check list of questions (Coming Soon) that you should consider asking the agency or client before taking on a new assignment and potentially falling foul of IR35.