Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard


IR35 case highlights an unfair balance of power

The recent publicity about BBC presenter Christa Ackroyd’s dispute with HMRC about her personal service company and the application of the IR35 rules has generated much debate. Rather than commenting on the case itself, I do want to reflect on some of the wider issues which it raises, particularly what might be called ‘equality of arms’.

Often, though not always, there is a mutual advantage in the use of a personal service company. For the individual contractor a service company results in lower overall rate of tax and for the end user there is no employers’ national insurance bill and no employment law concerns. So, while everything is working well there are generally no problems. But what happens when HMRC challenges the arrangement? You might expect that the contractor and the end user are both involved in the dispute and that in effect it is them together against HMRC. But this is not the case.  

The way that the rules work is that where there is a successful challenge the additional tax and NIC falls entirely on the service company - even though the end user will have saved NIC through the use of the arrangement. More than that, HMRC can obtain information about working practices from the end user which can then be used to build the case against the service company. To those involved at the sharp end, this can seem extremely unfair. Where the end user is a large organisation it can bring the whole weight of its corporate muscle and legal clout to ensure that its position is protected whereas the individual contractor often has very little resource with which to defend his/her position.

This is not a criticism of large corporations as such: it is an inevitable consequence of the way that the system works. The government could have structured the legislation so that any additional tax liability fell on the end user. Indeed this was the original intention before intensive lobbying caused a rethink and shifted the liability entirely onto the service company. The problem has now been addressed in the public sector, where any liability does now fall on the end user (though this is not retrospective) and as a result personal service companies have more or less disappeared there. But the old rules still apply in the private sector: surely it is only a matter of time before the new approach will operate there as well.

Fairness of process, as well as outcomes, is important in a well-functioning tax system. So surely if something is set up as a mutually beneficial arrangement the individual man or woman should not be left to carry the can when things become difficult.

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