MDRotteveel Dissertation 28092016

Mathijs Rotteveel
Independent contractors:
Tax me if you can!
Supervisor: Dr Bénédicte Sage-Fuller
Student number: 114224460
14,993 words
28-9-2016

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
3.2 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

3.7 The Contractors Project p. 33
3.8 Taxpayers facing uncertainty p. 37
4. UK’s IR35: sixteen years of controversy 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
5. Conclusion p. 56
Bibliography p. 61

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.

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.

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.

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?

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
and Self employment Arrangements” (28-1-2016), Upper Merrion Street, Dublin, p. 4.
14 Ibid.

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.
Industry” (Winter 2015), printed by Trade Union Labour, p. 8.
21 Ibid.

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.

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.

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.

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.

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.

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.
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.

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
54 Stevenson, Jordan & Harrison Ltd v MacDonald and Evans, [1952] ITLR 101.
55 Ibid.

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.

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:
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.

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.
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.

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
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.

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.

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.
and Self employment Arrangements” (28-1-2016), Upper Merrion Street, Dublin, p. 4.

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.

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
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.

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.
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.
7.
101 Ibid.
102 Ibid.

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
104 Contracting Plus, “The Professional Contractors Services Organisation Forum”, website viewed on 15-8-2016.
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.

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.

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.

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.

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.

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.
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.

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.

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.
152 Ibid, p. 1429.

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.

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.

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.

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.

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.
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.

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.

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
190 Ibid, p. 12.

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
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.

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.

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
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.

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.

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.

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.
219 Ibid.
220 Ibid.
221 Finance Act 2000, United Kingdom, Schedule 12.

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.

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.

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
7.
229 Ibid.
230 Ibid, p. 8.

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.
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.
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.

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.

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,

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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