IR35 The case against “contractors”.

16/3 16:00

It is worth being aware that there IS a good case for HMRC’s apparent “war on contractors”.

Managed Service Company (MSC)

The MSC legislation (Chapter 9 ITEPA 2003) April 2007 was enacted to counter a tiny number of huge contractor operations where if I recall correctly it was alleged 240,000 “contractors” were in fact domestic cleaners and the like. These folk had no idea they were “self-employed contractors” and all the benefits of these operations flowed to the operators and employers, unknown to the workers. I remember when this law’s teeth clamped down. These operators had 14 days to get out of the business or get a p.a.y.e. bill for every one of their “contractors”. Someone had been making a LOT of money and it wasn’t the workers. The method of operation meant that every last detail of the business of every contractor was done for them, for the contractor; to the extent they had no idea they were running a company etc. The operators pulled out within those 14 days.

Of course the trouble with all these extreme examples (think “loan” schemes) is it makes life more painful for everyone else as well and the money being made by the operators and inventors is eye watering.

Opinion

Frankly, what they were doing was a legalised scam. In my opinion. The legal shut down enacted by parliament was appropriate.

Appropriateness

What is not appropriate is HMRC using that statute against modern day accountants and even bookkeepers providing the same services accountants have always provided to their clients. Such things as being the company secretary, doing bookkeeping and providing the company and advice around its structure or assistance with bank matters, even advising on salary and dividend policies is (was!) bread and butter work.

The right to professional advice and support — or not

In my opinion, this is covert HMRC action to deprive hundreds of thousands of people of the professional advice and support to which everyone else is entitled without fear of retribution from HMRC.

Use of that old legislation which was apt for its time is now an abuse of the parliamentary purpose of that law in my view.

Threat to the Treasury

The amounts of money that were being lost back then were seen as, and I think were “a threat to the treasury”. That requires action which was duly enacted and rightly so.

The impact was some wealthy people lost a source of cashflow and profit, and continued in business to this day as far as I know. Of course presumably not operating in that way, since I expect they will always act to be legally compliant exactly as they did back then.

Modern day application

The amounts of money involved these days, compared to back then are a small insignificant fraction and attempts to collect that cash are placing people and their livelihoods at risk. The hallmarks used today completely ignore what was actually going on in terms of damage and why it was stopped. There are no operations like those that were targeted back then, but the law is still on the books, as I suppose it needs to be as a gatekeeper. It need clarifying.

The law was brought in so fast it cannot have been considered with regard to future application. It was an effective tool for immediate use, not to deprive future individual people of professional services and not to destroy the livelihoods of both those professionals and contractors. It was a sledgehammer to knock down a wall, not for cracking nuts. Clarification is required.

Parliament’s intentions

In my opinion, HMRC using this law now is an abuse of what parliament intended. HMRC won a recent case, but had to go to appeal to do it and by the looks of it this was only because of the denial of professional services being required to not be guilty.

Denial of professional services and advice

So, we have to say to our clients, “sorry we cannot provide to you the full range of services that we provide to everyone else”, pretty much because HMRC say so. They do not want you properly advised or accounted for, so you will be rendered vulnerable to their advances and enquiries.

Exception to the rule

Note that an employee of a contractor company is excluded as being capable of being an MSC.

Conclusion

One can see how HMRC staff might think it is fine to use a law which is available on the books. However, they do not have the context of why it is there, and if they do, then it is an abuse of power. In my opinion.

Bear in mind civil servants by law are not held accountable for what they do to individuals regardless of the damage caused. I need to find the authority for this as it is an old memory based on unpleasant personal experience.

https://www.gov.uk/guidance/understanding-off-payroll-working-ir35