From funny man to every day tax evasion

The first few months of the financial year have been busy, to say the least, what with taxation becoming high profile through Jimmy Carr and Take That’s avoidance, and Cameron’s reported haven. But it’s the lower profile cases – people working outside IR35 – that we’re more concerned with. And with the first rounds of the new IR35 consultation, tax isn’t a topic that’s about to die down any time soon.

The problem is, people are working but not paying national insurance. Limited company contracting gives them a way to do this, but people take a lot of risk; there’s no certain income and no employee benefits. And there’s possibly millions of limited companies out there. Some of them may be operating legitimately, and the government states that it does recognise them as a cornerstone of developing business. But many limited companies operate as a way for people to be creative with tax.

It’s this “disguised employment” that IR35 was created to combat. With a new team of officials, whose purpose is solely to deal with people working outside IR35, and a £900 million investment in HMRC by the government to tackle tax avoidance, evasion and minimisation, it’s no wonder that some contractors are panicking and possibly unsure of where they fall.

IR35 was controversial enough when it was introduced. Then the Business Entity Tests were released by HMRC in May in reaction to outcry from the PCG and the contracting world that IR35 isn’t clear. The aim was to help contractors define whether their contract and working practices fall inside of IR35, which means they’re operating legally, or outside and likely to be practicing tax evasion.

And then, in June, the General Anti-Abuse Rule came along. This consultation is targeted at artificial and abusive tax avoidance, and is described as a more strategic approach to the risk of avoidance opportunities. It basically stipulates that the law doesn’t have to be spelt out in detail, but if you’re contradicting what parliament intended, then HMRC will get the money.

Put all this together and tax avoidance is potentially becoming harder.

For umbrella companies, this is a leveller.

Tests are serving the purpose of showing the massive risk. If people are found to be at risk of IR35, either by random selection or focused investigation of tax returns, HMRC can initially go back seven years in retrospective tax, but can actually go back as far as they like.

People can still have their own limited companies, but they will have to pay similar tax and national insurance as an umbrella, without the employment benefits.

Operating through an umbrella company means that a contractor receives all the benefits of being employed, such as holiday and sick pay, and they’re also compliant because tax and national insurance are deducted and sent straight off to HMRC at the required rate.

1 Comment

  1. Brendan
    Nov 8, 2012

    Your post, From funny man to every day tax evasion | Colin's Thoughts, is really well written and insightful. Glad I found your website, warm regards!

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