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MDRotteveel Dissertation 28092016

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MDRotteveel Dissertation 28092016

  1. 1. Mathijs Rotteveel Independent contractors: Tax me if you can! Supervisor: Dr Bénédicte Sage-Fuller Student number: 114224460 14,993 words 28-9-2016
  2. 2. Table of Contents 1. Introduction p. 1 2. Employed or Self-Employed? Painting the whole picture p. 5 2.1 Introduction p. 5 2.2 Leaving traditional structures p. 5 2.3 The legal framework p. 7 2.4 The control test p. 11 2.5 The integration test p. 13 2.6 The entrepreneurial test p. 14 2.7 The intention of the parties p. 15 2.8 The current hybrid approach p. 15 2.9 The Revenue Code of Practice p. 17 2.10 Conclusion p. 19 3. Revenue’s struggle with one-man companies p. 21 3.1 Introduction p. 21 3.2 New structures p. 21 3.3 Tax schedules and PRSI Classes p. 23 3.4 Different benefits p. 27 3.5 Deductible expenses p. 27 3.6 Introduction of the Relevant Contract Tax p. 32
  3. 3. 3.7 The Contractors Project p. 33 3.8 Taxpayers facing uncertainty p. 37 3.9 Conclusion p. 38 4. UK’s IR35: sixteen years of controversy p. 40 4.1 Introduction p. 40 4.2 Tax differences between employees and company owners p. 40 4.3 Introduction of IR35 and MSC regulation p. 43 4.4 Continuous opposition against IR35 and MSC laws p. 47 4.5 Revenue’s dealing with unwilling stakeholders p. 52 4.6 Conclusion p. 54 5. Conclusion p. 56 Bibliography p. 61
  4. 4. 1 1. Introduction Recent news publications suggest that Ireland urgently has to cope with a serious problem called “bogus self-employment”. Past year we could read about an “Investigation into impact of bogus self-employment”,1 “Bogus self-employment in the Irish construction industry”2 and “Bogus self-employment encouraged by tax system”3 among many other stories. These news articles and some research reports present the prominent existence of bogus employment in Ireland as a given fact. As we can read in the first sentence of a research report published by Think Tank on Action for Social Change (TASC): “Work on Irish construction sites often involves bogus self-employment.”4 According to the Irish Congress of Trade Unions (ICTU) this unlawful way of working comes with serious financial harm to Irish Government, because it reduces the amount of tax collected. ICTU in December 2015 claimed an estimated loss to Irish Revenue of 640 million euro between 2007 and 2016, only in the construction industry.5 Just a month after ICTU’s news on Revenue’s significant loss due to bogus self-employment, the Government took action. In January 2016 the Department of Finance and the Department of Social Protection published a consultation paper entitled “Use of Intermediary-type Structures and Self-employment Arrangements”,6 wherein it invites interested parties to give their opinion on probable legislative measures to address the loss to the Exchequer coming from arrangements wherein workers who “would otherwise be an employee, establish a 1 RTÉ News, “Investigation into impact of bogus self-employment”, (28-1-2016). 2 RTÉ News, “Bogus employment in construction costing State – ICTU”, (3-12-2015). 3 Patsy McGarry, “‘Bogus self-employment’ encouraged by tax system, Tasc says”, (17-6-2016), The Irish Times. 4 Alicja Bobek and James Wickham for TASC (Think Tank for Action on Social Charge), “Bogus self-employment in the Irish construction industry”, (31-3-2016). 5 Irish Congress of Trade Unions (ICTU), “False Economy, The Growth of ‘Bogus Self-Employment’ in the Construction Industry” (Winter 2015), printed by Trade Union Labour. 6 Department of Finance and Department of Social Protection, “Consultation on the use of Intermediary-Type Structures and Self-employment Arrangements” (28-1-2016), Upper Merrion Street, Dublin.
  5. 5. 2 company to provide their services”.7 The “intermediary-type structures” mentioned in the title are used to set up these kind of arrangements. In the consultation, Government refers to other countries who have, according to Government, addressed the issues with self-employed in their tax laws, like Australia, Canada and New-Zealand. However, special attention goes to the United Kingdom (UK) where intermediary structures to turn employees into self-employed workers or directors and/or shareholders of a company have given rise to concern as far back as the 1980s.8 In the UK already in 2000 new tax legislation was introduced to cut the presumed loss to the Exchequer caused by these structures. The Irish consultation on these intermediary structures states that this legislation was extended later on, because the self-employed and their advisors developed new structures to avoid the newly introduced rules.9 Does this mean that the created intermediary companies created, were not as easy to catch by the new UK tax legislation as the Government and the Exchequer previously thought? And what where the consequences of the legislation introduced in the UK? Did the independent contractors unwind their intermediary structures to become employees again? Could the Exchequer show impressive revenue growth because of the introduction of the new legislation? To get answers to all these queries it is necessary to get an answer to one simple research question: Before introducing new legislation, what can the Irish legislature learn from the attempts in the UK to cut the presumed tax loss caused by workers operating through intermediary companies? The main reason to do a comparative analysis between the current Irish tax jurisdiction and the UK jurisdiction, concerning tax legislation for self-employed workers and their 7 Ibid, p. 1. 8 Ibid, p. 5. 9 Ibid.
  6. 6. 3 intermediary structures, is the fact that Irish Government mainly refers to the UK example in its consultation. However, there are more reasons to choose the UK and not another jurisdiction as a comparison. First, much of Irish legislation is inspired from UK law.10 Second, in this area of law many UK cases are a significant part of Irish case-law.11 Finally, the intermediary structures used in Ireland and the UK are comparable. The Personal Service Companies (PSC’s) and Managed Service Companies (MSC’s) that are being used to become independent contractors instead of employees have the same legal structure in Ireland as they have in the UK. To answer the primary research question, it was first important to find out what all these journalists and researchers meant with “bogus self-employment”. In news articles bogus self- employed people have been described as workers like any other employee. However, because they have set up a limited company, they have become their own bosses. Some articles even suggest that they have become self-employed against their own will at a click of the mouse by their employers.12 If they would not agree with their employer to become self-employed they would be out of work. The question came up if this would be possible within the Irish employment legislation. So in the first chapter the legal difference for tax purposes between an employee and a self-employed within the current Irish legal framework is described. This way the question of what really is meant with “bogus self-employment” will be answered. Chapter Two will describe the issues Revenue has with enforcing tax law on the growing cohort of independent contractors. As will be seen in Chapter One Ireland has a sophisticated, but laborious structure to decide who is an employee, who is self-employed and who is director and/or shareholder of his or her company. However, deciding who is who in the Irish 10 Albert Keating, “Jurisprudence positivist legal theory” (2016), 34(9) Irish Law Times, p. 132-136 and Thomas Mohr, “The Colonial Laws Validity Act and the Irish Free State” (2008), 43 Irish Jurist, p. 21-44. 11 See for example ECR Consulting Ltd v Revenue and Customs Commissioners, [2011] UKFTT 313, Ricketts v Colquhoun, [1925] 10 TC 118 and Samad Samadian v Revenue and Customs Commissioners, [2014] UKUT 13. 12 McGarry, supra note 3.
  7. 7. 4 labour market does not seem to be Revenue’s main problem. The next step seems to be a more cumbersome one: the collection of taxes from workers who qualify as directors or shareholders of a company. Chapter Two will provide a description of the legal framework regarding taxation of directors and shareholders and a description of the different attempts Government and Revenue have undertaken to get them to pay the amount of tax they legally owe. The third chapter concerns the measures the UK Government has introduced since 2000 to get a grip on the tax liabilities of directors and owners of intermediary companies over there. It will also outline the reasons why UK legislation is commonly seen as partly failed and why it is recently put under review again. In the Conclusion answers will be given to the primary research question: Before introducing new legislation, what can the Irish legislature learn from the attempts in the UK to cut the presumed tax loss caused by workers operating through intermediary companies?
  8. 8. 5 2. Employed or Self-Employed? Painting the whole picture. 2.1 Introduction The Irish Government has noticed a shift from traditional structures between employers and employees to a labour market wherein more people work in their one-man company or via other intermediary structures. According to Government this shift has resulted in an opaque market place wherein “bogus self-employment” is common practise, or as stated in the recent consultation wherein “two individuals who perform the same services for an end-user could have different tax outcomes and different entitlements to social insurance benefits”.13 This chapter examines the accuracy of this statement for tax purposes, considering the current legal framework and the relevant case-law. 2.2 Leaving traditional structures Is there a difference between an employee and a self-employed contractor? And if there is, what would it look like? The legal difference between an employee and a self-employed contractor, for tax purposes, has been subject of debate between employers, employees, politicians and academics for many years. This difference is also the main issue described in the consultation paper Use of Intermediary-type Structures and Self-employment arrangements that has been published by the Department of Finance and the Department of Social Protection in January 2016.14 According to the former Minister for Social Protection, Joan Burton, and the Minister for Finance, Michael Noonan, there is a noticeable shift in the Irish labour market from traditional employment structures between employers and their 13 Department of Finance and Department of Social Protection, “Consultation on the use of Intermediary-Type Structures and Self employment Arrangements” (28-1-2016), Upper Merrion Street, Dublin, p. 4. 14 Ibid.
  9. 9. 6 employees to self employed contractors and their clients.15 They write that: “The use of intermediary-type structures is becoming more prevalent as a means of providing labour. At its simplest, an individual worker who might otherwise be engaged as an employee by the person who uses his or her services, provides the services through an intermediary in the form of a “personal service company” or a “managed service company”.” 16 One of the consequences of this presumed shift from a tax perspective, is that not the employer via the PAYE (Pay as you earn) system is responsible for paying income tax for his employees, but the worker through his or her intermediary structure.17 This noticed shift to self employement is not a recent phenomenon. Crogan already in 2000 notices an increase in self employment in “certain sectors”.18 He sees the trend emerging in “booming economic areas” like the service, telecommunications, and IT industries.19 More recently the Irish Congress of Trade Unions (ICTU) points at significant growth of what they call “bogus” self- employment in the construction industry. It states that “from a low of 24% in 2005 (near the EU-15 average) self-employment has accelerated by over 50%”20 and concludes that “if current trends continue it is reasonable to assume the construction industry will be populated overwhelmingly by bogus self-employed workers in the near future”.21 Available figures produced by Eurostat, however, do not show any growth of self employed people – bogus or not – in Ireland so far. In 2014 Eurostat counts 11.3 self-employed on every 1.000 Irish 15 Ibid, p. 1. 16 Ibid. 17 Ibid, p. 2. 18 Richard Crogan, “The Trend Towards Self- Employed Contractors – Opportunities and Pitfalls” (2000), 7(7) Commercial Law Practitioner, p. 159. 19 Ibid. 20 Irish Congress of Trade Unions (ICTU), “False Economy, The Growth of ‘Bogus Self-Employment’ in the Construction Industry” (Winter 2015), printed by Trade Union Labour, p. 8. 21 Ibid.
  10. 10. 7 citizens, compared to 12.2 in 2006 and 12.5 in 2009.22 The figures above show it is difficult to get a clear conclusion on the size of the growth of self-employment or if there is any growth at all. However, the observation made by the ministers that the Irish labour market is moving towards a more complex range of employment relationships23 seems to be a correct one. The world of labour has changed during the last 20 years, which has had it impact especially on the pharmaceutical, information technology and construction sectors.24 Because of the increase in short-term project work, the pace of innovation and the mobility of talent, businesses increase their flexibility and more and more turn to self-employed contractors.25 2.3 The legal framework Also fiscal matters are often key for young people to chose to work in flexible and “quasi enterpreneurial ways”.26 Leighton and Wynn state that these young contractors do not “consider themselves employees, but neither are they small businesses (SMEs), as they do not employ others... They are non-employees/non-SMEs who frequently seek work through agencies and make use of limited companies or other types of organisations and networks”.27 These are the “personal service companies ” (PSC) and “managed service companies” (MSC) the Ministers are writing about in their Consultation.28 Neither the term “personal service company” nor “managed service company” is defined by law. According to the Select Committee on Personal Service Companies of the House of Lords a PSC is: 22 Eurostat Data Explorer, Self-employment by sex, age and citizenship, updated 2-3-2016. 23 Department of Finance and Department of Social Protection, supra note 1, p. 1. 24 Irish Tax Institute (ITI), “Response to Consultation on the use of Intermediary-type Structures and Self-employment Arrangements” (31-3-2016), p. 10. 25 Ibid. 26 Patricia Leighton and Michael Wynn, “Classifying employment relationships - more sliding doors or a better regulatory framework?” (2011), 40(1) Industrial Law Journal, p. 11. 27 Ibid. 28 Department of Finance and Department of Social Protection, supra note 1, p. 1.
  11. 11. 8 “understood generally to mean a limited company, the sole or main shareholder of which is also its director, who, instead of working directly for clients, or taking up employment with other businesses, operates through his company. The company contracts with clients, either directly or through an agency, to supply the services of its director”.29 Self-employed are the only owner of that newly created company and have the ability to expand their company by purchasing assets and employing staff. They are also fully responsible for the remittance of their taxes and the control of the expenses they claim. Next to the possibility of setting up a PSC self-employed could also opt for creating a MSC. This is a company in which they, together with other individual contractors, are one of the shareholders. As stated earlier also the term “managed service company” is not defined by law. The HM Revenue & Customs of the United Kingdom describes it as a scheme “which provides the services of workers and which does so through a managed service company scheme”.30 It adds that the scheme should fulfil four criteria:  the services of workers are provided by companies to others;  the majority of the money earned by the worker for their services provided through the company is paid to the worker;  a person termed the “scheme provider” (or their associate) exercises control over the company’s finances or general management; and 29 House of Lords, Select Committee on Personal Service Companies, “Personal Service Companies, Report on session 2013-14” (7th April 2014), Published by the Authority of the House of Lords, p. 7. 30 HM Revenue & Customs, “Tackling Managed Service Companies” (December 2006), St Clements House, Norwich, p. 19.
  12. 12. 9  the workers whose services are being provided do not exercise control.31 The difference with a PSC is that in a MSC the self-employed is not responsible for the correct remittances for taxes. He has outsourced that task to a service provider.32 According to PCSO we should add the “umbrella structure” as a popular structure for formerly self- employed to participate in the labour market.33 Herein the worker becomes an employee of the service provider. For the service provider he undertakes short term contracts. However he does not display the full characteristics of a self-employed person or business.34 These structures from a tax perspective balance on the line between employment en enterpreneurship. They are being used in a grey area in which it is very difficult to answer the question what the difference is between an employee and a self-employed. Therefore it is very difficult to establish the correct tax liabilities of the worker. The existence of this area is partly created by the legislator that did not draw a clear legislative line between employees and self-employed. The terms “employed” and “self employed” are not defined in the Taxes Consolidation Act 1997, nor in the Social Welfare Consolidated Act (SWCA). According to Moyne, there is “no exhaustive list... to determine the employment status”.35 According to McAvoy: “The question of whether an employee/employer relationship of some other type of relationship exists betwee two parties may... cause a problem from time to time. Generally, this difficulty arises in cases where it is unclear whether a person is 31 Ibid, p. 19. 32 Ibid, p. 19 and Professional Contractors Services Organisation (PCSO), “PCSO Submission to Department of Finance Consultation on the Use of Intermediary-Type Structures and Self-Employment Arrangements” (31-3-2016), p. 12. 33 Professional Contractors Services Organisation (PCSO), “PCSO Submission to Department of Finance Consultation on the Use of Intermediary-Type Structures and Self-Employment Arrangements” (31-3-2016), p. 24. 34 Ibid. 35 Louise Moyne, “Employed vs Self Employed” (Dec. 2011), 4 Accountancy Plus, p. 28.
  13. 13. 10 providing services as an employed person so as to be taxable under Sch E in respect of the resulting emoluments or is acting in a self-employed capacity so as to be chargeable under Sch D on the profits of a trade or profession.”36 Generally, states Moyne, “if there is a contract of service between two parties, then there is a contract of employment. A contract for services implies the self employed status of the service provider”.37 The difference between a contract of service and a contract for services has been considered by the Supreme Court in the case Henry Denny & Sons (Ireland) Ltd t/a Kerry Foods v Minister for Social Welfare (hereinafter Denny).38 The legal question was wether shop demonstrator Ms Mahon was an employee for social welfare law purposes or not. If Ms Mahon was an employee, according to Meenan39 she would be an insurable person for the purposes of the social welfare of the Social Welfare (Consolidation) Act 1981.40 Ms Mahon's contract described her as an independent contractor and purported to make her responsible for her own tax affairs. She was given a daily rate and a mileage allowance. She was not under supervision of Denny but was given written instructions to carry out her work. Materials were supplied and Denny needed to consent possible sub-contracting. The case was brought to the High Court where Keane J decided Ms Mahon was an employee. He stated that: “In general a person will be regarded as providing his or her services under a contract of service and not as an independent contractor where he or she is performing those services for another person and not for himself or herself. The degree of control exercised over how the 36 McAvoy Associates (Dara Burke, Joe McAvoy and John Ward), “Irish Income Tax” (2012), Dublin, Ireland, Bloomsbury Professional, p. 1168. 37 Moyne, supra note 35, p. 27. 38 Henry Denny & Sons (Ireland) Ltd t/a Kerry Foods v Minister for Social Welfare, [1998] 1 IR 34. 39 Frances Meenan, Employment Law (November 2015), Ireland, Round Hall, Section 2, Par. 10. 40 Under section 5(1)(a) of the 1981 Act “Every person over the age of 16 years and under pensionable age is 'an insured person' for the purposes of the legislation if he or she is employed in any of the employments specified in Part I of Schedule1.” According to Meenan Paragraph 1 of part I refers to: Employment in the State under any contract of service or apprenticeship, written or oral, whether express or implied, and whether the employed person is paid by the employer or some other person, and whether under one or more employers, and whether paid by time or by the piece or partly by time and partly by piece, or otherwise, or without any money payment.
  14. 14. 11 work is to be performed, although a factor to be taken into account, is not decisive.”41 As Keane J did in the Denny case,42 every case has to be considered on its own merits. As a result of case law, tests have been developed to assist in determining a taxpayer’s status.43 In the following paragraphs I will describe the major tests, which have been used in Irish courts. 2.4 The Control Test The first test to consider is the Control Test, firstly established in Yewen v. Noakes.44 It was applied in Roche v Kelly and Co. Ltd.45 and considers the element of control that the employer can exercise over the employee in order to determine the relationship between the two parties. In this case Roche would build a barn for a farmer for a lump sum of £300. He would supply contruction materials and build the barn under his own specifications. His progress was monitored but not his working methods. He had considerable experience and had done comparable jobs for Kelly in the past. Roche suffered an injury while constructing the barn. The question was wether Roche was an employee and who would be responsible for the insurance. Walsh J said: “While many ingredients may be present in the relationship of master and servant, it is undoubtedly true that the principal one, and almost invariably the determining one, is the fact of the master’s right to direct the servant not merely as to what is to be done but as to how it is to be done. The fact that the master does not exercise that 26 Denny, supra note 38. 42 Ibid. 43 Mark Barrett and David Clancy, “Employed v Self-Employed Status”, 23(1) Irish Tax Review (2010), 23(1), p. 60, Frances Meenan, Employment Law (November 2015), Ireland, Round Hall, Chapter 2, Par. 2. and McAvoy Associates (Dara Burke, Joe McAvoy and John Ward), “Irish Income Tax” (2012), Dublin, Ireland, Bloomsbury Professional, p. 1168-1179. 44 Yewen v Noakes, [1880] 6 QBD 530. 45 Roche v Kelly and Co. Ltd., [1969] IR 108.
  15. 15. 12 right, as distinct from possessing it, is of no weight if he has the right.”46 It was decided that Roche was an independend contractor. According to Moyne “the right to interfere with how the individual carried out their work and the fact that the farmer did not exercise control over the individual were important findings and became known as the control test”.47 Nowadays, the control test does not always provides the needed guidance.48 It was developed in the 19th century, when the relation between master and servant was much clearer than now. Moreover, it is not suited for skilled workers, who are told what to do but who have their own responsibility as to how to do it. This point was made in Cassidy v Ministry of Health.49 In this case the master of a ship was clearly an employee, but the ship owners were not entitled to tell him how to navigate their ship. In Re Sunday Tribune the court recognised that in a modern context supervisors might tell their skilled workers what to do. But, given their lack of expertise, they are not able to explain how to do it. Therefore, the control test was no longer of universal application.50 Because of changing employment relationships, according to Moyne “obviously further clarification was required”.51 Additional tests were laid down following the case of Ready Mix Concrete (SE) Ltd v Minister of Pensions and National Insurance.52 In this case the Court had to determinate if the driver and owner of a lorry was an employee of Ready Mixed 46 Ibid. 47 Moyne, supra note 35, p. 28. 48 Per Keane J. in Henry Denny & Sons (Ireland) Ltd t/a Kerry Foods v Minister for Social Welfare, [1998] 1 IR 34 at 49; [1998] E.L.R. 36. 49 Cassidy v Ministry of Health, [1951] 2 KB 343. 50 Re Sunday Tribune, [1984] IR 505, see also Mark Barrett and David Clancy, “Employed v Self-Employed Status”, 23(1) Irish Tax Review (2010), 23(1), p. 60. 51 Ready Mix Concrete (SE) Ltd v Minister of Pensions and National Insurance, [1968] 2 QB 497 and Moyne, supra note 35, p. 28. 52 Ready Mix Concrete (SE) Ltd v Minister of Pensions and National Insurance, [1968] 2 QB 497.
  16. 16. 13 Concrete or not. The court decided that he was if three tests were met: 1. The mutual obligations test – if there is no obligation on the employer to offer work or on the other party to do the work, there is no contract of service. 2. Whether the employee agrees that he will be subject to the other’s control expressly or impliedly to a sufficient degree to make the other party his employer. 3. Whether the provisions of the contract are consistent with it being a contract of service e.g. employer’s financial risk, employees entitlement to holiday pay, pension etc., employer’s opportunity to profit.53 2.5 The integration test The integration test was applied by Denning LJ in Stevenson, Jordan & Harrison Ltd v MacDonald and Evans.54 The issue considered here is whether the worker is integrated into the employer's business. If he is more integrated he is more likely to be an employee. As Denning LJ stated: “A man is employed as part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.”55 Clarke J also considered the control test in Re Sunday Tribune Ltd. He examined that a former employee who had been employed on a shift basis as a sub-editor, who worked under the guidance of a chief editor, was an employee, as was a journalist who was paid a fixed sum a week for writing columns. However, a person who wrote regular articles, for which he got paid seperately, was considered to be a freelancer. According to Daly and Doherty the problem with the integration test is that the courts have not clearly spelt out what is meant by 53 Moyne, supra note 35, p. 28. 54 Stevenson, Jordan & Harrison Ltd v MacDonald and Evans, [1952] ITLR 101. 55 Ibid.
  17. 17. 14 'integration'.56 They state: “it applies quite well to professionals over whom the employer does not have direct control, it does not fit so well with others, such as outworkers or sub-contractors, who may be highly integral to the employer’s business without necessarily being employees. This is particularly the case given the growth in the use of outsourcing by employers”. 57 2.6 The entrepreneurial test This test consists to determine if a person is working for another or for himself, on his own account. The question in this test is: who takes the entrepreneurial risks? To answer this question in the UK case Market Investigations v Minister for Social Security58 sub-questions have been asked, like: Does the person performing the services supply his own equipment and can he hire his own helpers? Other questions would be if he carries financial risks and what opportunity he has to make a profit. Finally it also matters to what extend he carries the responsibility for investment and management.59 Relying on Cooke J. in Market Investigations v Minister for Social Security Keane J. in the Denny case suggested that the fundamental test to be applied is this: “Is the person who has engaged himself to perform these services performing them as a person in business on his own account?’. If the answer to that question is ‘yes’, then the contract is a contract for services. If the answer is ‘no’, then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive 56 Brenda Daly and Michael Doherty, “Principles of Irish Employment Law” (2010), Dublin, Clarus Press, p. 45. 57 Ibid. 58 Market Investigations Ltd v Minister of Social Security, [1969] 2 QB 173. 59 Ibid.
  18. 18. 15 list can be compiled of considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor.” 60 2.7 The intention of the parties As stated earlier the issue of whether an individual is an employee or self-employed is determined by all of the facts. This issue cannot be resolved only by declarations of involved parties written down in, for example, a contract.61 In the Denny case the company was not satisfied with the way the appeals officer regarded the terms of the written contract which stated that the individual was deemed to be an “independent contractor”.62 However, Murphy J was satisfied that the appeals officer had concluded rightly to consider ‘‘the facts and realities of the situation on the ground’’.63 He did establish the true relationship between the parties, rather than merely relying on the ‘‘labels ascribed by them to their relationship’’.64 2.8 The current hybrid approach As stated by Cox et al. “the question as to what the correct test is to be applied in determining the legal status of a worker remains a vexed and complex one”.65 Before Cox goes over to the teachings of Denny66 case he adds that: 60 Denny, supra note 38. 61 See Mark Barrett and David Clancy, “Employed v Self-Employed Status”, 23(1) Irish Tax Review (2010), 23(1), p. 61, Frances Meenan, Employment Law (November 2015), Ireland, Round Hall, Chapter 2, par. 2-22 and Louise Moyne, Louise, “Employed vs Self Employed” (Dec. 2011), 4 Accountancy Plus, p. 28. 62 Denny, supra note 38, p. 3. 63 Ibid, p. 6. 64 Ibid, p 13. 65 Neville Cox, Val Corbett and Desmond Ryan, “Employment Law in Ireland ” (2009), Dublin, Clarus Press, p. 71. 66 Denny, supra note 38.
  19. 19. 16 “It would seem that the approach that has now found favour in both Ireland and the United Kingdom is a general, multifaceted one. This approach views the relationship between the parties holistically and may be summarised by the question; was the worker in business on his of her own account?”67 The then described Denny case considered various tests and criteria in determining the status of the employment relationship. It introduced the economic test considering whether the individual is economically independent from the person requiring the work to be done.68 As described earlier the case related to the status of a supermarket demonstrator, who was paid by the supplier of the free samples she gave away. In the High Court Carroll J said that the relevant case law made clear that a number of tests could be applied: 1. the control test 2. the integration test 3. the economic reality test (the three Mixed Concrete questions) and 4. the entrepreneurial or 'own business' test (Market Investigations).69 Keane J said in Denny: “In general a person will be regarded as providing his or her services under a contract of service and not as an independent contractor where he or she is performing those services for another person and not for himself or herself. The degree of control exercised over how the work is to be performed, although a factor to 67 Cox, supra note 52, p 66. 68 Denny, supra note 60. 69 Market Investigations Ltd v Minister of Social Security, supra note 58, see also Mark Barrett and David Clancy, “Employed v Self-Employed Status”, 23(1) Irish Tax Review (2010), 23(1), p. 62.
  20. 20. 17 be taken into account, is not decisive.”70 He concludes that “each case must be considered in the light of its particular facts and of the general principles which the Courts developped”.71 This was later confirmed by the decision of Edwards J in Agriculture and Food v Barry and Others (hereinafter Barry).72 Daly and Doherty add that “this requires the exercise of judgement and analytical skill and it is not, according to Edwards J, possible to arrive at the correct result by testing the facts of the case in some rigid, formulaic way.”73 Mummery J in Hall (HMIT) v Lorimer74 compares the exercise to contemplating an impressionist painting: “To decide whether a person carries on business of his own account... is not a mechanical exercise of running through items on a check-list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture form the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole.” 75 2.9 The Revenue Code of Practice The difficulties in deciding the employment status of individuals have been around for many years. Therefore, in 2000 the Department of Social, Community and Family Affairs, the Revenue Commissioners and representatives of the social partners set up a body – the 70 Denny, supra note 38. 71 Ibid. 72 Minister for Agriculture and Food v Barry and Others, [2008] IEHC 216, see also: Mark Barrett and David Clancy, “Employed v Self-Employed Status”, 23(1) Irish Tax Review (2010), 23(1), p. 62. 73 Daly and Doherty, supra note 56, p. 48. 74 Hall (HMIT) v Lorimer, [1993] 66 TC 349. 75 Ibid.
  21. 21. 18 Employment Status Group (ESG) – which published a report on this topic.76 The initial goal of the report was to finally create “a uniform definition of ‘employee’ based on clear criteria, which will determine the employment status of an individual”.77 As this approach was found to be too rigid by many, the ESG decided to just confirm the usual indications of employment in the Code of Practice and distribute this to an audience as big as possible.78 According to O'Shaughnessy in chosing the “usual indications” the ESG leaned heavily on the conclusions of the Denny case which were largely reproduced in the “Code of Practice for Determining Employment or Self-Employment Status of Individuals” of The Revenue.79 In this Code of Practice the 'enterprise test' of the Denny case was, according to O'Shaughnessy, “presented as the most important or fundamental test in the ESG report, which stated that 'the overriding consideration or test will always be whether the person performing the work does so as a person in business on their own account'”.80 This rigid interpretation of the Denny judgment was criticised by Edwards J in the Barry case.81 Herein Edwards J indicated that the 'enterprise test' is only on a par with the other factors taken into account.82 Also in the case of Brightwater Selection (Ireland) Limited v Minister for Social and Family83 the rigid interpretation of the Denny judgment was criticised. Revenue has not been deaf to these remarks, but has reflected them in the most recent Code of Practice. Herein the 'enterprise test' has a much lighter role. The line quoted before on the 'enterprise test' as 'the overriding consideration or test' has been replaced by: 76 Employment Status Group, Report of the Employment Status Group – PPF (2000), Dublin. 77 Ibid. 78 Daragh O'Shaughnessy, “Employed or Self-Employed? The Implications of the Brightwater Case” (2012), Issue 2 Irish Tax Review, p. 118. 79 Irish Revenue Commissioners, “Code of Practice for Determining Employment or Self-Employment Status of Individuals”, updated June 2010. 80 O’Shaughnessy, supra note 78, p. 118. 81 Minister for Agriculture and Food v Barry and Other, supra note 72. 82 Ibid. 83 Brightwater Selection (Ireland) Limited v Minister for Social and Family Affairs, [2011] IEHC 510.
  22. 22. 19 “An important consideration in this context, will be whether the person performing the work does so “as a person in business on their own account”. Is the person a free agent with an economic independence of the person engaging the service? This consideration can be a useful indicator of the person’s status and should be considered in conjunction with the other criteria listed in this code of practice.”84 O’Shaughnessy argues for more changes in the Code of Practice.85 His main argument for that can be found in the judgement of the Barry case.86 He states that the court reaffirmed that “there must be a mutuality of obligation between employer of employee. This hurdle must be crossed before any of the other factors determining employment can be considered”. This conclusion might, according to O'Shaughnessy, be reason for further amendments of the Code “to recognise the High Court's restated opinion on the importance of 'mutuality of obligation' in employment cases”.87 2.10 Conclusion As stated in the introduction the Irish Government has recently observed a shift in the labour market from traditional to more opaque structures. As result it is, according to Government, possible that “two individuals who perform the same services for an end-user could have different tax outcomes and different entitlements to social insurance benefits”.88 This chapter described the legislation and case-law concerning the employment status of workers in Ireland. As described subsequently in significant cases like Denny89 , Barry90 and 84 Irish Revenue Commissioners, “Code of Practice for Determining Employment or Self-Employment Status of Individuals”, updated June 2010, p. 2. 85 O’Shaughnessy, supra note 78, p. 120. 86 Minister for Agriculture and Food v Barry and Other, supra note 60. 87 O’Shaughnessy, supra note 78, p. 121. 88 Department of Finance and Department of Social Protection, “Consultation on the use of Intermediary-Type Structures and Self employment Arrangements” (28-1-2016), Upper Merrion Street, Dublin, p. 4. 89 Denny, supra note 38. 90 Minister for Agriculture and Food v Barry and Other, supra note 72.
  23. 23. 20 Brightwater91 there does not exist an easy formula to determine ones employment status. Though, with painting the whole picture of one’s situation and considering all the relevant facts, it is possible to establish the tax status for each individual at a certain place and time. Therefore, the Government’s assertion on two individuals offering the same services with different tax labilities does not seem to have a solid legal foundation. Government might be rightly concerned about the enforcement issues regarding the tax liabilities of the growing amount of contractors and their intermediary companies. Even more because those liabilities can change with every new contract they sign. Those issues will be described in Chapter 2. However, efficient enforcement of existing law is not the issue put forward by the Ministers in their consultation paper Use of Intermediary-type Structures and Self-employment Arrangements. 91 Brightwater Selection (Ireland) Limited v Minister for Social and Family Affairs, supra note 83.
  24. 24. 21 3. Revenue’s struggle with one-man companies 3.1 Introduction For Revenue a shift from traditional employer-employee structures to self-employment has big consequences. It has to deal with two main issues. Firstly the determination of who is an employee and who is not, described in Chapter One. Secondly, regarding taxpayers that do not qualify as an employee but as a director of their own company, Revenue has concerns that tax liabilities are often understated to the taxpayer’s benefit. Overstatement of deductible expenses has been said to be a major issue for Revenue for years. Therefore it has initiated different measures to counter this. This chapter will describe the current legal framework and relevant case-law regarding taxation of directors and shareholders. Also will it analyse Revenue’s attempts to get a grip on their deductibles. 3.2 New stuctures The Ministers of the Department of Finance and the Department of Social Protection in their recently published consultation paper Use of Intermediary-type Structures and Self- employment arrangements92 express concerns that the burden of complying to tax laws, thus filing tax returns and paying tax, is more and more shifting from employers to employees.93 According to the Ministers one of the consequences hereof is that instead of employers being responsible for applying the PAYE system in respects of the worker, the worker becomes responsible, via an intermediary structure.94 The notice of a shift from employment to self- employment is not a recent one.95 It is described already in 2000 by Crogan and Revenue has 92 Department of Finance and Department of Social Protection, “Consultation on the use of Intermediary-Type Structures and Self-employment Arrangements” (28-1-2016), Upper Merrion Street, Dublin. 93 Ibid, p. 2. 94 Ibid. 95 Richard Crogan, “The Trend Towards Self- Employed Contractors – Opportunities and Pitfalls” (2000), 7(7) Commercial Law Practitioner, p. 159.
  25. 25. 22 complained about the financial consequences, since 2013 at least.96 Many parties involved argue the financial impact of this trend on Revenue income is not clear.97 Still, the Irish Congress of Trade Unions (ICTU) provided an estimate of the loss to Revenue of what they call “bogus self-employment” in the construction industry: 640 million euro between 2007 and 2016.98 Although this figure is a very raw estimate, it has been quoted by numerous Irish media99 , whereafter the Ministers initiated their consultation. In their consultation paper the Ministers refer to structures wherein the self-employed sets up a personal service company (PSC) or a managed service company (MSC). As described in Chapter 1 PSCs and MSCs are corporate structures through which workers offer their services to their clients: companies.100 In PSCs, workers are the sole director or sole shareholder of their company. In MSCs workers take no part in the on-going management or financial control of the MSC. That control usually lies with the providor of the MSC, usually an administration office or accountant that charges the shareholders/workers a certain fee.101 The different shareholders/workers in the MSC can hold a different class of shares in that company. For example, Shareholder A holds class A shares, Shareholder B holds class B shares, and so on. The shareholding entitles the workers to receives dividends, based on the amount of payment the MSC receives for the shareholders’ work.102 96 Irish Revenue Commissioners, “Letter of Commissioner Anthony Buckley to Mr Mark Barrett, South West Representatives Irish Tax Institute”, 22-1-2013. 97 Irish Tax Institute (ITI), “Response to Consultation on the use of Intermediary-type Structures and Self-employment Arrangements” (31-3-2016), p. 7 and Professional Contractors Services Organisation (PCSO), “PCSO Submission to Department of Finance Consultation on the Use of Intermediary-Type Structures and Self-Employment Arrangements” (31-3-2016), p. 25. 98 Irish Congress of Trade Unions (ICTU), “False Economy, The Growth of ‘Bogus Self-Employment’ in the Construction Industry” (Winter 2015), printed by Trade Union Labour, p. 9. 99 RTÉ News, “Bogus employment in construction costing State – ICTU” (3-12-2015), Martin Wall, “Bogus selfemployed ‘cost State €600m since 2007’” (3-12-2015), Irish Times e.a. 100 HM Revenue & Customs, “Tackling Managed Service Companies” (December 2006), St Clements House, Norwich, p. 7. 101 Ibid. 102 Ibid.
  26. 26. 23 The Professional Contractors Services Organisation (PCSO) has also noticed the increase of people wanting to work in PSCs and MSCs.103 The representative body for service providers for PSCs and MSCs was set up in 2014.104 It states that 28% of the individual professionals are short-term contractors and therefore to pay “exactly the same as any other employee i.e. Class A PRSI”.105 But the remaining self-employed have set up structures like MSC’s or PSC’s which they own exclusively. PCSO adds that “they are paying taxes as director/employees and applying Class S social insurance”.106 3.3 Tax schedules and PRSI Classes The fact that self employed set up PSCs and MSCs and become directors and shareholders of those companies has consequences for their tax liability and liability to social charges. Their tax status is defined in the Taxes Consolidation Act 1997,107 which is described firstly. Afterwards will follow a description of the legal structure in which they pay their social charges, in Ireland called the Pay Related Social Insurance (PRSI) contribution. These are levied by Revenue under the Social Welfare (Consolidation) Act, 2005108 and passed on to the Department of Social Protection. Considering the payment of income tax, regarding employees and directors of PSC’s and MSC’s, the relevant tax category would be Schedule E.109 Directors who usually are shareholders of a PSC or MSC can provide themselves with income by paying themselves salary or dividends. If paying salary, their income would be liable to income tax under 103 Professional Contractors Services Organisation (PCSO), “PCSO Submission to Department of Finance Consultation on the Use of Intermediary-Type Structures and Self-Employment Arrangements” (31-3-2016), p. 25. 104 Contracting Plus, “The Professional Contractors Services Organisation Forum”, website viewed on 15-8-2016. 105 Professional Contractors Services Organisation (PCSO), “PCSO Submission to Department of Finance Consultation on the Use of Intermediary-Type Structures and Self-Employment Arrangements” (31-3-2016), p. 6. 106 Ibid. 107 Taxes Consolidation Act, Ireland, 1997 108 Social Welfare (Consolidation) Act, Ireland, 2005. 109 Taxes Consolidation Act, Ireland, 1997, supra note 107, Section 19 and 112.
  27. 27. 24 Schedule E. Dividend payments are liable to Schedule D Case IV and subject to Dividend Withholding Tax (DWT).110 The DWT rate for dividends under Schedule D Case IV is 20% in 2016111 and the tax due is adjusted against the overall Income Tax liability of the tax payer.112 Whether paying dividends or salary, to determine if one is liable to tax within Schedule E, two questions need to be answered: 1. Is the person in employment liable to tax under Schedule E? 2. If so, what income is chargeable? Both answers can be partly found in Section 112 TCA 1997. This Section describes who is charged to tax and it includes the notion of “emoluments”113 , which describes anything assessable to income tax under Schedule E: “Income tax under Schedule E shall be charged annually on every person having or exercising an office or employment of profit mentioned in that Schedule, or to whom any annuity, pension or stipend chargeable under that Schedule is payable, in respect of all salaries, fees, wages, perquisites or profits whatever therefrom, and shall be computed on the amount of all such salaries, fees, wages, perquisites or profits whatever therefrom for the year of assessment.”114 Other than emoluments of an office, employment or pension, income tax is charged on certain expenses, benefits in kind, payments made in connection with the termination of an 110 Taxes Consolidation Act, Ireland, 1997 Section 43, 49 and 50 or Section 20 for Schedule F if their company is quoted (which usually is not the case). 111 Patrick Mulcahy, “Irish Taxation: Law and Practice 2016/2017” (2016), Dublin, Irish Tax Institute, p. 502. 112 Irish Revenue Commissioners, “Dividend Withholding Tax - General Information Leaflet (INFO 1 V4)”, viewed on 25- 9-2016, Section 11. 113 Ibid, Section 112: “Emoluments means anything assessable to income tax under Schedule E.” 114 Ibid, Section 112.
  28. 28. 25 office or employment and certain pension payments not within a retirement benefit scheme.115 In all, if there is an employment arrangement with a direct relation to the payment in question, a Schedule E charge is placed.116 However, exeptions have occured. In the case of Reed v Seymour117 the taxpayer was a cricket player who was given the revenues of a benefit match, played in recognition for his long and distinguished service to the Kent Cricket Club. The House of Lords held that the payment was not taxable under Schedule E. It was held that the profit was not arising from his employment but was a personal gift that recognized the pleasure the patrons of the club had had due to the qualities of his play. So some payments arising in the context of an employment relationship may actually be seen as not being part of the employment emolument and therefore not taxable under Schedule E. Income tax schedule E is characterised by the “pay as you earn” (PAYE) system.118 This system allows employers to deduct tax, Universal Social Charge (USC) and PRSI contributions from their employees’ paycheques as it is due. Employers deduct income tax of 20% or 40% of the total emoluments119 , USC between 1% and 8% and a PRSI contribution of 4%120 , before they pay their employees their earned wages. Next to the 4% PRSI contribution paid by the employee, the company itself pays a 10.75% PRSI contritbution for every employee on the payroll.121 Taxes have to be paid to Revenue that transfers tax income to the Department of Finance. 115 Tom Maguire, “Irish Income Tax” (2016), Dublin, Bloomsbury Professional, p. 1291. 116 Ibid. 117 Reed v Seymour, [1927] 11 TC 625. 118 Kieran Gallery of the Irish Tax Institute, “Irish Taxation: Law and Practice 2015/2016” (2016), Dublin, Irish Tax Institute, p. 561. 119 Ibid, p. 305. 120 Irish Revenue Commissioners, “Employers Guide to PAYE”, viewed on 18-5-2016. 121 Gallery, supra note 118, p. 305.
  29. 29. 26 Next to withholding income tax for his or her employees, within the PAYE system employers also withhold PRSI contributions for employees.122 Because PRSI contributions are not considered tax but premiums for social insurance, they are forwarded to the Department of Social Protection. The payers of PRSI are divided into 11 different Classes: A,B,C,D,E,H,J,K,M,P and S. Employees are classified in Class A and pay 4% PRSI.123 In contrary to their treatment concerning income tax, where they both are in Schedule E, employees and controlling directors are treated differently for PRSI. Directors of PSC’s and MSC’s who own more than 50% of their company are in Class S, just like self-employed. Class S has the same contribution rate as Class A for employees, namely 4%.124 There are differences however. Firstly, self-employed must file returns and pay preliminary tax under the self-assessment system. Also, if an employee starts working via a PSC or MSC the employee, now director and/or shareholder of his or her company, might earn a profit and might pay him or herself dividends. First he or she pays him/herself an income taxed in schedule E.125 But for tax purposes he/she could pay him/herself a low salary and high dividends. On the profit he or she will first pay a corporate tax rate of 12.5%.126 Dividend payments have a flat tax rate of 20%.127 One of the most significant financial differences between PRSI Classes S and A, mainly benefits the employer or the client of the MSC or PSC. Where in Class A the employer pays a PRSI contribution of 10.75% for every employee, he does not pay any PRSI for that same person if he hires his/her business for a temporary consult under Class S.128 122 Department of Social Protection, "PRSI Contribution Rate and User Guide 2016 – SW 14", website of www.welfare.ie. 123 Ibid. 124 Ibid. 125 Gallery, supra note 118, p. 305. 126 Ibid, p. 677. 127 Ibid, p. 678. 128 Department of Social Protection, supra note 122.
  30. 30. 27 3.4 Different benefits However, the lower tax rates for owners and directors of MSC’s and PSC’s is not free of charge. They do give up some social welfare benefits, as there are also significant differences between PRSI Classes A and S regarding these benefits. Self-employed individuals, directors and majority shareholders who are categorized in Class S are not entitled to the same benefits as employees in Class A. Among others jobseekers' benefit, invalidity pension, treatment benefit, maternity benefit and illness benefit are not available for PRSI-payers in Class S.129 Also do directors in Class S have an other way of building up their private pension than employees in Class A.There are also significant differences between the way individuals in Class S and Class A can build up their private pensions. Employee pension schemes are operated at the discretion of employers. They operate under the supervision of certain industry-specific authorities.130 Employers need to to appoint a personal retirement savings account (PRSA) provider to facilitate pension payments by employees. According to Barrett and Clancy “the employer contributions made to approved schemes are not subject to tax in the hands of the employee, and there is scope for significant funding”.131 Self employed and directors or owners of a company can make their pension contributions through retirement annuity contracts (RACs). There is much more flexibility in pension schemes for employees then for self-employed or directors.132 3.5 Deductable expenses Both employees and directors who pay tax under Schedule E are allowed to deduct expenses 129 Mark Barrett and David Clancy, “Employed v Self-Employed Status” (2010), 23(1) Irish Tax Review, p. 63. 130 Ibid. 131 Ibid. 132 Ibid, p. 64.
  31. 31. 28 from their taxable income.133 TCA 1997 Pt 5 Ch 3 describes that income tax is charged under Schedule E on expenses and benefits in kind.134 This rule applies to any director of an incorporated body, irrespective of the level of his emoluments. According to Maguire “any person who takes part in the management of the affairs of a body corporate, but who is not a director, is treated as an employee for the purposes of TCA 1997 Pt 5 Ch 3 even if not directly employed by the body”.135 On the contrary, a partner in a partnership or sole traders do not have an employment to which this Chapter applies. Even, states Maguire, “he clearly takes part in the management of his business.”136 The deductability of expenses by employees, directors and self-employed has long been a major concern for Revenue.137 With the increase of the amount of professionals working as a director of an MSC or PSC and operating under Schedule E, this concern has grown.138 TCA 1997, S 114 is the primary rule governing the deductibility of expenses from Schedule E emoluments.139 It has been subject to many cases and is an issue that concerns Revenue so here it follows in full: “If the holder of an office or employment is necessarily obliged to incur and defray out of the emoluments thereof the expenses of travelling in the performance of the duties of the office or employment, or otherwise to expend money wholly, exclusively, and necessarily in the performance of the said duties, there may be deducted from the emoluments to be assessed the expenses so necessarily incurred and defrayed.140 133 Taxes Consolidation Act, supra note 107, Pt 5 Ch 3. 134 Ibid. 135 Maguire, supra note 115, p. 1242. 136 Ibid. 137 Irish Revenue Commissioners, “Letter of Commissioner Anthony Buckley to Mr Mark Barrett, South West Representatives Irish Tax Institute”, 22-1-2013, p. 3 and Irish Revenue Commissioners, “Revenue's Contractors Project”, Tax Briefing 4 of 2014, p. 1. 138 Izzy Hatfield, “Self-employment in Europe”, Institute for Public Policy Research, 14 Buckingham Street, London, p. 3 139 Taxes Consolidation Act, supra note 107, Section 114. 140 Ibid.
  32. 32. 29 Vaisey J in Lomax v Newton finds the rules on the deductability of expenses ‘notoriously rigid, narrow and restricted in their operation’.141 An important case considering expenses is Ricketts v Colquhoun.142 That considered a barrister living and working in London but holding a Recordship of Porthsmouth. He was not allowed to deduct travel expenses nor hotel costs in order to attend hold court for the Recordship in Porthsmouth. In his judgement Viscount Cave LC said about the travel expenses: “They must be expenses which the holder of an office is necessarily obliged to incur that is to say, obliged by the very fact that he holds the office, and has to perform its duties and they must be incurred in, that is, in the cours of, the performance of those duties. The expenses in question in this case do not appear to me to satisfy either test.”143 Viscount Cave stated that the rule imposed two limitations. Firstly: the deductions are only allowed if the expenses incurred in the performance of the duty. Secondly: the deduction are further limited by the qualification that the expenses must be wholly, exclusively and necessarily so incurred.144 Ricketts v Colquhoun was referred to in the Irish case of Phillip v Keane.145 These cases indicate, according to Maguire, that the strictness of the rule is more applicable to the “performance of the duty” then to the necessity.146 Maguire: “This follows because an expense incurred in actually carrying out the agreed duties 141 Lomax v Newton, [1953] 34 TC 558. 142 Rickets v Colquhoun, [1925] 10 TC 118. 143 Ibid. 144 Ibid. 145 Phillip v Keane, [1925] I ITR 64. 146 Maguire, supra note 115, p. 1419.
  33. 33. 30 of an employment will not normally be of a kind which is referable to the personal circumstances or olition to the taxpayer... The objective test of necessity will, however, still be very much in point where an expense is incurred ‘in the performance’, but the amount of the expense is excessive or unduly extravagant.”147 As many directors of MSC’s and PSC’s work from home, domestic expenses and travel expenses are the most relevant sources for possible deductions. First the domestic expenses, which would be deductible if their home was recognized as “a normal place of work”.148 However, Revenue only accepts home as a normal place of work in certain specific situations. It states that “Revenue does not accept that the location at which the administration of the intermediary is carried out and its books kept (whether this is at the registered office of the intermediary or at the director’s home) constitutes a normal place of work of the director/employee”.149 Or as Croom-Johnson J held in Bolam v Barlow150 : “many of us have to take work home... but that is not what the rule says”. Therefore, according to Maguire “in many cases the domestic expenses will fail the ‘wholly and exclusively’ element of the Rule”151 and will not be deductible. But directors of MSCs and PSCs have a second chance: travel expenses. Usually an employee is based in an office and may spend substantial periods away from it.152 Revenue describes in SP IT/2/07 which travel costs are deductible in cases like that: 147 Ibid. 148 Ibid, p. 1429. 149 Irish Revenue Commissioners, "Reimbursement of Travel and Subsistence Expenses by Intermediaries", Tax Briefing 3 of 2013, p. 3. 150 Bolam v Barlow, [1949] 31 TC 136. 151 Maguire, supra note 21, p. 1428. 152 Ibid, p. 1429.
  34. 34. 31 “Where a business journey commences from the employee’s home or the employee returns directly to home, then the expenses of travel and subsistence that may be reimbursed without deduction of tax are the lesser of those incurred on the journey between: (a) home and the temporary work location; or (b) the employer’s base (normal place of work) and the temporary work location.”153 According to Maguire Revenue has accepted an employee working at different locations on a daily basis can deduct costs of travelling between those different places of work.154 As many directors of MSC’s and PSC’s regard their homes as their office, their place of work, they should be able to deduct costs of travelling to and from home. According to Owen v Pook a ‘place of work’ seems to be a ‘fixed location’ where the employee is required to do his/her work.155 Also generally travelling expenses from home to a place of work are not deductible because they do not incur “in the performance of the duties”.156 Still, travel between two places of work undertaken to perform the duties of employment at those two places, is deductible. Some case law suggests that also one’s home could be one of the working places.157 Then, if the director’s base is home, also travelling expenses between his/her home office and a temporary work location would be deductible. Interesting to notice is a recent Upper Tribunal (UT) decision in Dr Samad Samadian v HMRC, 158 which might mark a tightening of the Revenue practice in the United Kingdom. Judge Sales J applied the “wholly and exclusively” 153 Irish Revenue Commissioners, “Income Tax, Statement of Practice SP-IT/2/07”, July 2015 (revised), p. 10. 154 Ibid. 155 Owen v Pook, [1970] A.C. 244. 156 Irish Revenue Commissioners, supra note 149, p. 6. 157 Gilbert v Hemsley, [1980] 55TC 419, see also Maguire, supra note 112, p. 1429. 158 Samad Samadian v Revenue and Customs Commissioners, [2014] UKUT 13.
  35. 35. 32 test strictly on Dr Samadian’s travels from a private hospitable to his home office.159 He ruled that the costs of his drive home were not deductible because: “Dr Samadian needs a home in which to live and carry on his private life, and it is an inevitable feature of his journey home in the evening from the private hospitals that part of his purpose was to get there in order to advance those private, non-business interests.”160 After deciding on the Samadian case Sales J concluded his judgement with setting out three categories of deductible and non-deductable travel expenses for self-employed persons.161 The first category of travel was travel related to “itinerant work” which is, according to Sales J, deductible.162 The second, also deductible category, is between places of business. The third, most controversial category, is between places of work and home, which the judge held was not deductible.163 3.6 Introduction of the Relevant Contracts Tax Issues with overstating expenses are no new phenomenom to Revenue. Because of compliance issues in the construction industry with expenses, already in 1970 the Relevant Contracts Tax (RCT) was introduced. Later the scope of the tax was extended to include forestry and meat processing. But, according to Nolan, the construction sector in 2011 still made up more 95% of the RCT tax base.164 RCT is a tax deduction system that obliges principal contractors in mentioned industries to deduct tax at a maximum of 35% from payments, including VAT, made to sub-contractors. In S531(1) of TCA 1997 the three 159 See also Judith Freedman and Glen Loutzenhiser, “Samadian v HMRC: deductibility of travel expenses when working from home, Case Comment” (2014), 3 British Tax Review, p. 248. 160 Samad Samadian v Revenue and Customs Commissioners, supra note 158. 161 Ibid. 162 Ibid. 163 Ibid. 164 Seán Nolan, “Taking the Paper Burden out of RCT” (2011), 4 Irish Tax Review, p. 56.
  36. 36. 33 conditions for withholding RCT are stated. The payment must be made by a principal, to a subcontractor in respect of a relevant contract.165 Since reforms of RCT implemented in 2012 the tax rate that is applied to the sub-contractor depends on his/her compliance record.166 According to Revenue Commissioner Nolan for sub-contractors that are ‘unknown’ to Revenue or who have failed to address ‘serious compliance issues’, the 35% rate still retains.167 Others are at a 20% rate. According to Revenue the reasons for change of the RCT in 2012 were reduction of the administrative burden and the reduction of RCT-rates to 20%, the level of standard tax rates.168 Since then all contacts between principals and Revenue are through an electronic RCT service and all principals must be registered for the Revenue Online Service (ROS). 3.7 The Contractors Project But even RCT has not managed to take away Revenue’s issues with what it calls “contractors” understating their tax liabilities. According to Revenue those contractors cause structural problems with which it has to cope.169 In a letter to the Irish Tax Institute (ITI) it states: “We are currently reviewing the tax affairs of companies and their directors, where the main source of income is a contract or contracts 'for service' with a larger company or companies (directly or through intermediaries), the company in question does not appear to have a substantial business separate from these contracts, and in moste cases the director(s) are the only employees of the company and pay tax 165 Taxes Consolidation Act, supra note 107, Section 531 (1). 166 Nolan, supra note 164, p. 57. 167 Ibid. 168 Ibid. 169 Irish Revenue Commissioners, “Letter of Commissioner Anthony Buckley to Mr Mark Barrett, South West Representatives Irish Tax Institute”, 22-1-2013.
  37. 37. 34 through PAYE. To date we have established that in many cases there are deficiencies in accounting for input costs and expenses, with the result that there has been a significant understatement of tax liability to the benefit of the director(s).”170 Revenue describes that it is focussing on expenses, not on the question if company directors should by regarded as employees: “We are not expressing an opinion on whether the arrangements we encounter are valid, that is, whether the company directors should properly be regarded as direct employees of the entity awarding the contract. This question is being reviewed and may be adressed in the future. For the moment, our concern is that in many cases too small a proportion of the gross contract payment is reported as liable to tax in the hands of the contractor.”171 Revenue in November 2013 again highlighted the issue of individuals providing their services to clients via intermediaries in a tax briefing on its Contractors Project.172 This project was originally started in the South West of Ireland, but later on rolled out in the whole of Ireland. It focusses on, among other issues, the review of expenses of one-man companies. According to Revenue the main issues are claims by self-employed of expenses that did not occur, the treatment of travel expenses and hiring family members as employees.173 Revenue describes the existence of intermediary structures, MSC’s and PSC’s, wherein the individual is treated by the intermediary as an employee. It states that these structures have been used for tax evasion when “intermediaries paid taxfree 'expenses' in circumstances 170 Ibid. 171 Ibid. 172 Irish Revenue Commissioners, “Revenue's Contractors Project” (November 2013), 4 Tax Briefing. 173 Ibid.
  38. 38. 35 where the expenditure had not actually been incurred”.174 It adds that “in other circumstances, the expenses had no relation to the business”.175 Revenue adds that some contractors were using the intermediary company, which they usually owned, to contend that they were compliant PAYE taxpayers, while at the same time extracting a large part of income from the company, free of tax by payments for expenses. Revenue: “In some of the worst cases encountered, up to 70% of income was extracted in this manner.”176 According to Maguire Revenue within the Contractors Project has taken a strong stance on travel and substance expenses.177 He states that Revenue: “... assert that the cases selected for audit appear to have serious issues around expenses.”178 Revenue tried to clarify its position on the taxfree reimbursement of travel expenses in Tax Briefing 3 of 2013, entitled Reimbursement of Travel and Subsistence Expenses by Intermediaries.179 The main point of this briefing is that “home cannot be treated as a normal place of work”.180 Revenue adds that it “does not accept that the fact that administrative work is carried out at home, or that home is the registered office of the intermediary alters this position. It follows that the cost of travel to and from home may not be reimbursed free of tax”.181 Maguire doubts Revenue’s interpretation of current legislation and argues that, as techology has moved on, it is easier for people to work from home. If their home becomes their office, he states that “travelling from that office to another place of work should be allowed”.182 Maguire concludes that “there are situations that the Revenue are incorrect in disalloweing 174 Ibid, p. 1. 175 Ibid. 176 Ibid. 177 Maguire, supra note 115, p. 1431. 178 Ibid. 179 Irish Revenue Commissioners, "Reimbursement of Travel and Subsistence Expenses by Intermediaries", Tax Briefing 3 of 2013. 180 Ibid, p. 3. 181 Ibid. 182 Maguire, supra note 115, p. 1431.
  39. 39. 36 travel expenses – for example, where an employee gave up their office due to the downturn and are now working from a pupose-built office in their garden”.183 The case law indicates that Maguire is correct in this view. In Owen v Pook184 the taxpayer was a doctor who was required to be standby for emergency operations. He was responsible for a patient as soon as he got a phone call from the hospital and he gave crucial instructions over the phone to hospital staff. The taxpayer duly claimed travel costs between his home and the hospital. Another issue highlighted by Revenue in its Contractors Project is the hiring of family members. It states that it “has found that, in some of the cases examined in the course of the project, alleged employments of family members were not bonafide”.185 It emphasizes that: “The family member must be performing services or duties in the business and rates of pay must be similar to the rates paid to other employees doing the same type of work. If the pay is for technical work, the employee (payee) should have the skills, qualifications and experience necessary to carry out that work and to justify the rate of pay.”186 Finally in its briefing Revenue makes clear that penalties occur in cases of tax default. If taxpayers have liability to additional tax due to deliberate behaviour, they are liable to penalties ranging from 75% to 100%, and to audit of several years if evidence of possible tax fraud is discovered.187 183 Ibid. 184 Owen v Pook, [1970] A.C. 244. 185 Irish Revenue Commissioners, supra note 172, p. 5. 186 Ibid. 187 Ibid, p. 6.
  40. 40. 37 3.8 Taxpayers facing uncertainty In its letters to involved parties and in published briefings Revenue keeps emphasizing that it is concerned about the understatement of tax liabilities of directors of contractors but that it does not want to express “an opinion on whether the arrangements we encounter are valid”.188 It does not want to conclude yet if the hired contractor should have been treated as an employee and that the accompanying taxes should have been paid by the employer. Still the threat of a possible change of opinion and penalties up to 100%, according to intermediary representative PCSO, cause uncertainty at end clients offices. PCSO states: “End clients want to remove any ambiguity of status and insulate themselves from any tax and employment risks... They are concerned that Revenue Commissioners may retrospectively impute an employee relationship and claim the associated taxes and penalties thereon. This is an area that needs to be addressed as a matter of urgency.”189 PCSO adds: “The present practices with regard to expenses and how they are being applied by Revenue are creating considerable difficulties for the sector and importantly for the end clients. There is much anecdotal evidence of professional contractors seeking positions abroad and also a considerable number leaving the sector completely.”190 The Irish Congress of Trade Unions (ICTU) blames the Revenue Online Services (ROS) ,as applied in construction, forestry and meat processing, for the growth of MSC’s and PSC’s in those sectors. And for the following possible understatement of their tax liabilities. ICTU argues that the paper based RCT registration system required “a worker to consider the nature 188 Irish Revenue Commissioners, “Letter of Commissioner Anthony Buckley to Mr Mark Barrett, South West Representatives Irish Tax Institute”, 22-1-2013. 189 Professional Contractors Services Organisation (PCSO), “PCSO Submission to Department of Finance Consultation on the Use of Intermediary-Type Structures and Self-Employment Arrangements” (31-3-2016), p. 47. 190 Ibid, p. 12.
  41. 41. 38 of the (self-employed) contract they were being offered and to sign a form stating they were genuinely selfemployed”.191 ICTU that the paper-based system “also clearly spelt out the right and entitlements the worker would sign away by opting for self-employment: in terms of pay, pension, sick pay, holidays, social insurance etc.”192 ICTU believes these checks have been lost in the online system. It states that “a ‘principal contractor’ can propel a job candidate out of the PAYE system at the click of a mouse”.193 According to Alicja Bobek of think-tank Tasc the introduction of RCT to prevent bogus self-employment has failed.194 She states it brings the law and tax compliance into ‘disrepute’ by generating ‘a nod-and-a-wink culture in which everybody signs statements which they know are untrue’.195 3.9 Conclusion The presumed shift from traditional labour relations between employers and employees to owners of MSC’s and PSC’s and their clients is said to result in a smaller income base for Revenue. However, because directors and majority shareholders also give up benefits, the long term financial result for Revenue is not clear. To give a reasonable opinion on the long term financial impact of this shift on Ireland’s budget, more research is necessary. Revenue states a significant problem of the growing number of people working via MSC’s and PSC’s is their overstatement of expenses. However, as shown in Lomax v Newton, Ricketts v Colquhoun and Phillip v Keane the rules on deduction of expenses are narrow and strict. The more recent Samadian case might even show a tightening of Revenue practice, at least in the United Kingdom. Still, the Irish Revenue keeps trying to introduce new measures to counter presumed overstatement of deductions. However, the Relevant Contract Tax and later The 191 Irish Congress of Trade Unions (ICTU), “False Economy, The Growth of ‘Bogus Self-Employment’ in the Construction Industry” (Winter 2015), printed by Trade Union Labour, p. 7. 192 Ibid. 193 Ibid. 194 Alicja Bobek and James Wickham for TASC (Think Tank for Action on Social Charge), “Bogus self-employment in the Irish construction industry” (31-3-2016), p. 17. 195 Ibid.
  42. 42. 39 Contractors Project have not shown the desired results. On the contrary, these measures sometimes had an adverse effect and surely have hot helped creating a stable regulatory environment for small and medium enterprises to flourish. With its consultation on the “Use of Intermediary-type Structures and Self-employment arrangements” the Irish Government now has the chance to look forward and create a solid base for small and medium enterprises to grow, without eroding its tax base. Doing that it could learn from the United Kingdom, where similar issues with MSC’s and PSC’s in 2000 resulted in new legislation, called IR35. The next chapter will describe the creation of IR35, its working and the reasons it is now seen as failed legislation.
  43. 43. 40 4. UK’s IR35: sixteen years of controversy 4.1 Introduction In the letter presenting their consultation on the “Use of Intermediary-type Structures and Self-employment Arrangements”196 the Department of Finance and Department of Social Protection give special attention to the United Kingdom (UK) where legislation was first introduced in 2000 to address concerns about “the use of intermediary-type structures”.197 They state that in the UK : “The original aim was to deal with PSCs but it became apparent that MSCs were also an issue and further legislation was introduced to deal with them. More recently, legislation was introduced to deal with offshore intermediaries.”198 However, they do not state that the intermediaries legislation – often referred to as IR35 – was met with fierce opposition from the beginning. Neither do they describe that non-compliance has led to new enquiries to change existing legislation199 . The following chapter will describe the faltering introduction of IR35 in the UK, the following adjustments and the reasons why it is now commonly seen as failed legislation.200 4.2 Tax differences between employees and company owners In the United Kingdom (UK) personal service companies (PSCs) and managed service companies (MSCs) were seen as a threat to the fairness of the tax system. People who work 196 Department of Finance and Department of Social Protection, “Consultation on the use of Intermediary-Type Structures and Self-employment Arrangements” (28-1-2016), Upper Merrion Street, Dublin. 197 Ibid, p. 5. 198 Ibid, p. 5. 199 HM Revenue & Customs, “Intermediaries Legislation (IR35) discussion document” (17-7-2015), 100 Parliament Street, London, p. 2. 200 Ibid, p. 2 and p. 4 and House of Lords, Select Committee on Personal Service Companies, “Personal Service Companies, Report on session 2013-14” (7th April 2014), Published by the Authority of the House of Lords, p. 8 and p. 31.
  44. 44. 41 for their own limited company can pay a lower rate of National Insurance contributions (NICs, comparable to Irish PRSI) and a lower effective rate of tax, just like in Ireland. The rates of income tax for employees in the UK are between 20% and 45% in 2016/2017.201 Next to that, above a threshold of £8,112 a year, employees pay National Insurance contributions (NICs) of 12%.202 The employer’s contribution to NIC is a yearly payment of 13,8% on all income paid to the employee.203 When doing the same work via a PSC or MSC the employee, now director and/or shareholder of his or her company, will earn a profit and might pay him or herself dividends. On the profit he or she will pay a corporate tax rate of 20%.204 Dividend payments are tax free under 11.000£, 7.5% up to a threshold of 32,000£ and 32.5% above that.205 NICs are reduced to 9% on profits between £8,060 and £43,000 and 2% on profits over £43,000.206 Moreover, employers do not have to pay any NICs on payments to a PSC or MSC.207 The difference between the tax contributions of contractors working as an employee or as a director or owner of a PSC or MSC is significant and well illustrated by the following example provided by HM Revenue & Customs (HRMC).208 Jo and Ben work as lawyers in 2015-2016 for a legal company on the same cases and both earn £70.000 a year. Jo works as an employee. The company deducts income tax and employee NIC’s from her salary and pays employer NIC’s on top. The total tax and NIC’s is paid on Jo’s salary is £30.612 (£22,071 by Jo and £8,541 by her employer). Ben works 201 HM Revenue & Customs, “Tax and credit rates and thresholds for 2016-17” (25 November 2015), website of www.gov.uk, viewed on 21-7-2016. 202 Ibid. 203 Ibid. 204 HM Revenue & Customs, “Dividend Allowance factsheet” (17 August 2015), www.gov.uk, viewed on 21-7-2016. 205 Ibid. 206 HM Revenue & Customs, “Self-Employed National Insurance rates” (April 2016), website of www.gov.uk, viewed on 21 7-2016. 207 Ibid. 208 HM Revenue & Customs, supra note 199, p. 3.
  45. 45. 42 through a PSC. He pays himself a low salary and high dividends. His total tax and NIC’s liability is £16,900.209 For a comparison with Irish tax rates, see the following table. United Kingdom Ireland Employee-employer Income tax 20-45% 20 or 40% Total NIC/PRSI210 25.8% 12.5-14.75% USC211 - 1-8% MSC/PSC-client Corporation tax 20% 12.5% Dividend tax 0-32.5% 20% or 40% Total NIC/PRSI 2-9% 4% USC - 1-8% In the UK this significant difference in tax liability of employees and directors of PSCs and MSCs in 1999 was seen as an issue by the then Government and HRMC. On March 9th 1999 HRMC published the now infamous press release IR35 stating that by exploiting the fiscal advantages offered by a corporate structure, workers could “leave work as an employee on a Friday, only to return the following Monday to do exactly the same job”.212 Doing this they paid a substantially reduced rate of tax and national insurance, as shown in the example above. According to HRMC these fiscal possibilities undermined fairness in British society.213 209 Ibid. 210 Total NIC/PRSI paid by employees and employers. 211 Universal Social Charge, which is paid in Ireland, not in the UK. 212 HM Revenue & Customs, “IR35: Press Release dated 9 March 1999”, Somerset House, London. 213 Ibid, p. 1.
  46. 46. 43 Due to unfair competition of PSCs British workers would be unable to “compete for jobs”.214 Those who operate PSCs were, again according to HRMC, underestimating the risks of losing protection under employment law, their sick pay, maternity leave and redundancy leave.215 Next to battling unfairness, the new legislation was also aimed at supporting small and medium size companies. As the press release states: “without the changes it would be very difficult to target support at genuine entrepreneurial activity - making such measures less effective and more costly”.216 HRMC Paymaster General Primarolo later wrote in a letter to the Times about the proposed legislation that “by tackling avoidance activity, the Government will be able to more effectively target its support for small business towards those who are creating wealth and employment”.217 HRMC recognized that there were many legitimate, commercial reasons for people to set up a PSC.218 It also recognized the advantages of flexibility and entrepreneurship for the British economy.219 Still, HRMC called the incentives for people to work through companies when they would otherwise be employees, and for companies to hire them to exploit the existing rules and legislation “unfair manipulation”.220 4.3 Introduction of IR35 and MSC regulation In April 2000 the Government introduced a new law for directors and shareholders of PSCs, named after the already mentioned press release IR35. The original provisions were published in the Finance Act 2000, Schedule 12.221 They have been rewritten and afterwards 214 Ibid. 215 Ibid. 216 Ibid. 217 Dawn Primarolo, “Reply to ‘Taxman’s net spreads wide confusion’”, The Times 20-11-2000. 218 HM Revenue & Customs, supra note 199, p. 3. 219 Ibid. 220 Ibid. 221 Finance Act 2000, United Kingdom, Schedule 12.
  47. 47. 44 included in the Income Tax Act 2003 (Earnings and Pensions) Part 2 Chapter 8.222 These sections consider workers who perform services for a client involving an intermediary. If the circumstances are such that, if these services had been provided under a contract directly between the client and the worker, the worker would have been an employee. Then the worker is treated as receiving earnings from employment and taxed accordingly.223 Because of the many questions Revenue got about to whom the new law would be applicable, it published a detailed Employment Status Manual.224 The many sections and the level of detail of the explanations highlight the complexity of the introduced legislation. Though, it gives a clear description to whom IR35 is applicable: Typically, the intermediary is the worker’s own personal service company (PSC) and consists of two Directors or one Director and the Company Secretary (who are often husband and wife). There are normally no other employees and usually only one worker is providing their services to the client. The intermediary earns all, or almost all, of its income from supplying the worker’s services in circumstances that would be employment if the worker were engaged directly by the client. However, there is no contract between the worker and the client. Instead, there is a contract between the intermediary and the client (either directly or via an agency) and the intermediary is paid to supply the worker’s services. These arrangements do not come within the provisions of the Agency legislation (ESM2001) and prior to April 2000 (ESM3011) provided an opportunity to disguise what would otherwise be an employment relationship with the client to: 222 Income Tax Act 2003 (Earnings and Pensions), United Kingdom, Part 2 Chapter 8. 223 Finance Act 2000, supra note 221 and Income Tax Act 2003 (Earnings and Pensions) Part 2 Chapter 8. 224 HM Revenue & Customs, “Employment Status Manual”, website of HM Revenue & Customs, viewed on 16-7-2016.
  48. 48. 45  reduce or avoid the individual’s liability to pay tax and primary Class 1 NICs, and  reduce or avoid employers’ liability to NICs. 225 MSCs were not seen as the main problem in 2000 and stayed largely untouched, for the time being. The relevant legislation concerning the operation of MSCs then, was Schedule 12 of the Finance Act 2000 and the Social Security Contributions (Intermediaries) Regulations United Kingdom 2000, 2000/727. Herein is stated that, regardless of how the composite service company is organised, • where an individual (“the worker”) personally performs services for the purposes of a business carried on by another person (“the client”); but • does so via a service company rather than directly; and • works for the client in such a way that they would be regarded as an employee of the client, had they worked for them directly rather than via the service company; then the service company will have to deduct and account for tax under PAYE and Class 1 National Insurance contributions in respect of that worker on (broadly) all of the money the service company receives from the client in respect of work done for the client by that worker.226 However, many professionals ensured that their contracts were stated such that they fell outside the rules. That is, states Redston, what the “the well-advised” do.227 Contractors that did not want to pay higher taxes according to legislation IR35, started to participate in a MSC rather than creating a PSC for themselves. According to HRMC figures the numbers of 225 Ibid. 226 Social Security Contributions (Intermediaries) Regulations United Kingdom 2000, 2000/727. 227 Anne Redston, “Small business in the eye of the storm” (2004), 5 British Tax Review, p. 574.
  49. 49. 46 workers in MSCs grew from around 65,000 in 2002-03 to 240,000 in 2005-06. So, with trying to tackle the PSC issue, the Government and HRMC added fuel to the creation of another one. Just like PSCs, MSCs are corporate structures through which workers offer their services to their clients: companies. In contrast to PSCs, workers in MSCs are not the sole director or sole shareholder of their company. Usually they take no part in the on-going management or financial control of the MSC, but rather operate as worker-shareholder.228 The different shareholders in the MSC can hold a different class of shares in that company. For example, Employee A holds class A shares, Employee B holds class B shares, and so on. The shareholding entitles the employees to receives dividends, based on the amount of payment the MSC receives for the shareholders’ work. Because every shareholder holds a different class of shares, it is possible to pay everyone different dividend percentages.229 According to HMRC “the MSC scheme provider handles payments between the agency and the MSC, deducting a fee for the work it carries out and arranging for the payment of the worker”.230 The MSC-regulations of the Finance Act 2000 and the Social Security Contributions (Intermediaries) Regulations United Kingdom 2000 proved to be too cumbersome to maintain for Revenue. As stated by Revenue in the 2006 Tax Briefing called “Tackling Managed Service Companies” “Enforcing the current rules is difficult with MSCs because of the large and growing number of workers involved and the resource-intensive nature of the legislative test. Furthermore, even when a debt has been established as the result of an investigation by HM Revenue and Customs, MSCs can escape payment because they have no assets 228 HM Revenue & Customs, “Tackling Managed Service Companies” (December 2006), St Clements House, Norwich, p. 7. 229 Ibid. 230 Ibid, p. 8.
  50. 50. 47 and can generally be wound up or simply cease to trade, with workers moving to a new MSC.”231 So, new legislation was introduced for MSCs on April 6th 2007 in Chapter 9, Part 2 Income Tax (Earnings and Pensions) Act 2003.232 This legislation works parallel to IR35 for PSCs. This new MSC legislation had to ensure that contractors and their clients would pay the same levels of tax and NICs as employees did. Tax relief for travel expenses would also be the same as for employees. And the Government acquired the authority to recover MSC tax debts from third parties.233 4.4 Continuous opposition against IR35 and MSC laws Already before the IR35 law was introduced in April 2000 the opposition against it was fierce. Representative groups of contractors, employers and scholars doubted the figures substantiating it, the Government’s intentions with the new law and its efficient working.234 They argued that the new rules did not solve any problems concerning self-employment and taxation, but merely exacerbated them. While emphasizing its strive to fairness, from the beginning it was clear that IR35 was also intended to increase total Revenue income. Actually the first sentence of the first press release states that “changes are to be introduced to counter avoidance”.235 The magnitude of that presumed avoidance became clear in the second press release. Revenue stated it would gather £475 million in additional yearly tax revenues because of the introduction of the new legislation.236 However, only a few months afterwards this number was raised to £900 million 231 Ibid, p. 3. 232 Income Tax Act 2003, supra note 222. 233 HM Revenue & Customs, supra note 228, p. 4. 234 See Philip Ross, Freedom to Freelance... Beginning the fight against IR35 (2012), Great Britain, Amazon, p. 217 and Institute of Chartered Accountants in England and Wales, “Towards a better tax system” (2000), Moorgate, London, p. 6. 235 HM Revenue & Customs, supra note 212, p. 1. 236 HM Revenue & Customs, “Personal services provided through intermediaries, preventing avoidance: preserving flexibility”, 23-9-1999, website of Nationalarchives.gov.uk, viewed on 16-7-2016.
  51. 51. 48 and published in the Treasury Budget for the coming year 2000.237 Where this new figure came from was unknown.238 Discussing the 2000 Treasury Budget the Shadow Paymaster General, Richard Ottoway, asked Paymaster General Dawn Primarolo why the income via IR35 had been raised from £475 million to £900 million.239 She did not answer the question. Also years after the introduction of the intermediary legislation, the Government was incapable or unwilling of providing any financial indications if IR35 was a success or not. When asked in January 2004 about the yield from IR35, Primarolo said that “it is not possible with any accuracy to isolate data relating solely to this legislation”.240 According to Ross, also after this instance Primarolo has never answered the question.241 The illegibility on the possible income on IR35 might be related to the ambiguity regarding the amount of personal service companies operating in the UK. According to Lagerberg Revenue originally thought that around 66,000 personal service companies were in existence.242 That figure was later revised to 125.000.243 However, the Professional Contractors Group (PCG), an organisation set up in 1999 to battle the introduction of IR35, claims there were between 90,000 and 120,000 PSCs in the UK in 2000.244 PCG claimed the estimated income on the new legislation would be not more than £350 million. For a long time after introduction of the new legislation Revenue could not produce any credible figures on the amount of PSCs.245 The incapability or unwillingness to answer detailed questions about the quantative basis of the law suggests that Revenue has been unable to keep track of the income provided by it, or 237 HM Revenue & Customs, “Budget 2000”, p. 139, website of gov.uk, viewed on 16-7-2016. 238 Philip Ross, Freedom to Freelance... Beginning the fight against IR35 (2012), Great Britain, Amazon, p. 201. 239 Ibid, p. 72. 240 Ibid, p. 75. 241 Ibid, p. 202. 242 Francesca Lagerberg, "The right amount of tax" (2004), 4 Private Client Business, p. 270. 243 Ibid. 244 Professional Contractors’Group & Ors v Commissioners of Inland Revenue [2001] EWCA Civ 1945 (21st December, 2001). 245 Ross, supra note 238.
  52. 52. 49 that the figures are much lower than expected. According to Lagerberg it does not really matter if the absence of information is caused by one reason or another. She states that “even if the lack of statistics is due to poor record keeping rather than a desire to mask the truth, it is clear that the Government is still grappling with the whole issue of taxing small companies”.246 Not only did the vagueness concerning the figures attached to IR35 invoked opposition. Also the real intentions of the Government were doubted by many.247 Considering the intentions for introducing the new law, one’s eye is quickly caught by the colourful language used by the Government and HRMC. The IR35 press release of March 9th 1999, after which the PSC law would be named, concludes with the Government’s goals: “These changes buttress the new measures to support small and medium sized companies. Without the changes it would be very difficult to target support at genuine entrepreneurial activity - making such measures less effective and more costly”.248 In the second press release Paymaster General, Dawn Primarolo, states: “I am determined that nobody should be able to avoid paying their fair share of tax and NICs just because of the way they structure their relationship with their clients”.249 Also in the Government's December 2003 Pre-Budget Report colourful language was used to describe measures concerning small businesses: “The Government will therefore bring forward specific proposals for action in Budget 2004 to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company, and so protect the benefits of low tax rates for the majority of small businesses.”250 One might 246 Lagerberg, supra note 242, p. 271. 247 See Judith Freedman, “Personal service companies - "the wrong kind of enterprise"” (2001), 1 British Tax Review, p. 1- 9, Francesca Lagerberg, "The right amount of tax" (2004), 4 Private Client Business, p. 266-272, Anne Redston, “Small business in the eye of the storm” (2004), 5 British Tax Review, p. 566-581 and Philip Ross, Freedom to Freelance... Beginning the fight against IR35 (2012), Great Britain, Amazon. 248 HM Revenue & Customs, supra note 212, (My emphasis). 249 HM Revenue & Customs, supra note 236, (My emphasis). 250 HM Revenue & Customs, “Pre-budget report 2003” (10-12-2003), website of www.webarchive.nationalarchives.gov.uk,
  53. 53. 50 reasonably think that the right amount of tax is the tax paid according to current legislation. And what is genuine entrepreneurial activity and a fair share and what is not? According to Revenue, the intention of the new legislation was to distinguish small companies that create wealth, from the ones that are set up just to avoid taxation.251 This is a task, with which even for the smartest economists would struggle. According to Freedman the notion that it is feasible to identify businesses which are not going to create wealth and employment is misguided.252 Some entrepreneurs start with a small company to grow it fast, others will not. Redston describes it colourfully, stating that “there is, for instance, no way to tell which IT specialist will become the next Microsoft, which chef will become the new Gordon Ramsay”.253 According to Freedman differentiating wealth producing from non-wealth producing and growing from static businesses “is a problem that has dogged small business policy”.254 According to Lagerberg the Government seems to be suspicious of small companies, especially where funds are extracted mainly by low salaries and high dividends.255 She emphasises that the fact that more contractors are setting up small companies is mainly thanks to tax reliefs initiated by the Government to support economic growth.256 Lagerberg states that: “The drive to incorporate was caused primarily by the Government offering a nil starting rate of corporation tax for profits up to £10,000. The result was that a business with profits of around £15,000 could save tax of well over £2,000 by operating through a company rather than remaining as a sole trader. The maths viewed on 22-7-2016, (My emphasis.). 251 HM Revenue & Customs, “IR35, Frequent Asked Questions”, www.webarchive.nationalarchives.gov.uk, viewed on 22- 7-2016. 252 Judith Freedman, “Personal service companies - "the wrong kind of enterprise"” (2001), 1 British Tax Review, p. 3. 253 Anne Redston, “Small business in the eye of the storm” (2004), 5 British Tax Review, p. 579. 254 Ibid. 255 Lagerberg, supra note 242, p. 266. 256 Ibid.

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