Welcome to the February 2006 edition of the PMMC Freelance eNewsletter.

Six years old and still going strong: in our first article Keith Preece of Qdos Consulting warns of a new approach being taken by the Inland Revenue in pursuing IR35 status cases.

How much would you pay a 'public servant' to go on a pub crawl? Or make a snowman? It turns out that in 2005 UK taxpayers unwittingly forked out in excess of £82 billion for just such wasteful, useless and yes, scandalous, expenditure by Government. We conclude with an article from the TaxPayers' Alliance in which Matthew Elliott and Lee Rotherham describe your tax payments 'at work' in the era of big government.

If you find the newsletter informative and useful, please feel free to forward it to friends or colleagues by using the link at the bottom of this email. You are also invited to contribute to future editions: if you would like to air your opinion, pass on pertinent information for freelancers or contractors, place an 'advertorial' or simply comment on the newsletter in general, please contact us.

The Intermediaries Legislation, otherwise known as IR35, is six years old. Although there is much uncertainty over the statistics, it would appear that the Revenue have lost many more IR35 arguments than they have won. Of course, the IR35 apologists will say that its value lies in the additional tax revenue obtained from those contractors who have decided to avoid uncertainty and tick the box to say that they are caught. It must also be remembered, that even if the individual Status Inspector were to win only one IR35 dispute per year, because of the very substantial amount of tax liability typically at stake, the yield from just one victory would look good in his annual stats. However, there can be no doubt that a very large number of contractors have successfully defended their claim to operate outside of the IR35 regime.

The most important factor in defending the contractor's IR35 status is to have a right of substitution. This demonstrates that a personal service is not required and that the contractor is operating as a genuine business. This is entirely logical. What employee would be allowed to engage and pay an alternative worker to replace him in his work, at times of his own choosing, and potentially to his own profit? This argument was conveniently supported by a legal precedent set in 1999: Express and Echo Publications Ltd v Tanton. The Court of Appeal stated that Mr. Tanton's ability to provide a substitute worker was inconsistent with a contract of employment.

Unfortunately subsequent landmark cases have not been so supportive. In the Synaptek case, because no substitute worker had been used in practice, the judge said that the claim to a right of substitution was inconclusive and that other factors had to be considered. In the Usetech case, it was decided that the absence of a right of substitution in the "upper level" contract, between the contractor's agency and the end client, meant that a personal service was required, making the arrangement more characteristic of employment. Thus the whole IR35 debate has become centred on the right of substitution issue, but not always to the contractor's benefit.

The Status Inspectors now use the following approach to counter any claim to a right of substitution:

1) Point out that a right to provide a substitute worker is not enough. In the Tanton case, the worker had an "obligation" to provide a replacement, in the event that he was unavailable, not just a "right".

2) Refer to the Synaptek judgement, in which the absence of a substitution in practice weakened the contractor's case.

3) Approach the end client to obtain a copy of the "upper level" contract, and if that indicates that a personal service is required, rely upon the precedent set in the Usetech case. Use security and other practical considerations to try to persuade the end client that substitution would not be possible.

The result is that it is now harder to defend IR35 challenges. Gone are the days when we could point to the "IR35 friendly" wording of the contractor's agency contract and expect to win the argument. Now we find ourselves in the uncertain position of having to rely upon the contents of documents that we have never seen, and to which we have no right of access. Some contractors could be presented with huge IR35 tax bills, simply because they were unaware that the terms of their agency contract were not reflected in the agreement between the agency and the end client.

What can be done about this worrying trend? The solution must be a change in our basic approach to contracting under the IR35 regime. We need relationships between contractors and their clients to be put upon a proper footing. The new approach should be as follows:

Contractors must realise that if they want the tax advantages of incorporation, then they must represent themselves as companies and not as individuals. Services provided to clients must be supplied by companies or firms, which might engage any number of employees or subcontractors in doing so.

The names of individual workers must be kept out of all documents, along with any other expressions suggesting that a personal service might be required (e.g. "approved consultant").

Contracts should be "tendered for", in preference to the common use of personal interviews and CVs.

The word "contractor" suggests to many clients that they are engaging an individual. The word "consultancy" would be a much more appropriate description of the service provider. We need to get around the substitution argument by the use of contractual clauses such as: "In providing the services, the consultancy may use any workers of its own choice, provided the workers concerned have the requisite skills to deliver the services effectively". Ensure that both agencies and their clients are aware of IR35 and the pressing need to describe their arrangements in suitable terminology.

We can circumvent the whole right of substitution debate, by emphasising that there is no presupposition that a specific individual will undertake the work. But in order to do this, contractors must stop thinking of themselves as individuals. In this context, the very use of the word "contractor" is unhelpful. A less personal emphasis would also assist in avoiding some of the difficulties that can occur around the issues of control and mutuality of obligation. This approach should also help the end clients to avoid the unwitting creation of an employment situation, so it can be shown to be in their best interests.

Keith Preece - Qdos Consulting Ltd

Editor's note: This article first appeared on Contractors Unlimited, the website for freelance contractors in the engineering industries, offering a unique combination of News, Contractors' Guides, Products and Services for freelance contractors and small businesses.

Qdos Consulting are specialists in taxation, VAT, employment law, health & safety and legal fees insurance, with a UK-wide network of associates and clients. Qdos are also the UK's leading authority on IR35 having defended over 560 cases, without having lost one; this has resulted in a saving of over £12 million in tax for clients.

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It is a universal truth that people are more careful with their own money than with others'. Nowhere is the axiom better demonstrated than in the topsy-turvy world of state spending.

Consider some of the projects that have recently been funded by the UK Government, and ask yourself whether the individuals who signed off the expenditure would have been quite so generous if the money came from their own pockets...

• £15,000 for a team of researchers to spend six hours in five pubs
• £77,000 to send a team of artists to the North Pole to make a snowman
• £40,000 on a 46-word 'Patient Definition Experience' that defines what makes a good experience for a patient.

Public bodies, meanwhile, never slow to moan about a shortage of resources, found enough in their coffers to add a 'Community Compost Development Officer', a 'Street Scene Outreach Officer', and a 'Director of Understanding and Enjoyment' to the payroll.

Other branches of national and European government paid for cows that never lived, olive trees that didn't die, and even whole farms that didn't exist.

Absurd, I know, but not laughable - because it is your money they are spending. The TaxPayers' Alliance have recently identified £82 billion in wasted and unnecessary government spending in 2005.

And guess what - that's actually a billion less than the amount which European Central Bank thinks is wasted!

But in the face of criticism, the machinery of government plunges on regardless. Politicians keep inventing and re-inventing grand designs that leave civil servants flailing in a sea of nonsensical codes, targets and quotas. The system becomes engorged, with bureaucrats trying to mend things that are not broken.

The result is a desperately manic managerial machine with its own self-justifying energy. The buzzwords tell you everything you need to know...

"Quality enhancement" in "service provision" works on "priority tasks" in "structures" that are "sustainable", generating "action plans" to meet "skills challenges" that are "co-ordinated within a framework" to "enhance a strategy" of "best practice".

Oh, come off it! These vacuous clichés make one weep with anger, not admiration. Given the right training and responsibility, individuals do a better job without the pettifogging interference of central government. The box-tickers not only cost us a fortune in salaries and pensions; they also exact a steep price on the professions they're supposed to help, demoralising doctors, teachers, and nurses and ultimately robbing the taxpayer of the service they are entitled to.

The sine qua non of this incompetent, extravagant, public spending is that taxes have gone through the roof. Total government spending is now £520 billion a year. That's £8,700 for every man, woman and child in Britain, or about two thousand million pounds each working day.

Money siphoned out of the system in this way saps resources from the wealth-creating side of the economy, and ultimately makes us all poorer. But it was not always like this. Until the First World War, the state confiscated only 10% of GDP. By 2007, the figure will be over 38%!

The TaxPayers' Alliance monitors this spending and produces an annual 'Bumper Book of Government Waste'. Popular support seems to be growing, so we decided to publish this year's edition in a hardback volume, put it in the shops, and see how big the movement out there really is. Readers will be pleased to know - early indications are that there is a deep sense of frustration among British taxpayers who know they are getting value for money.

The core lesson of this year's 'Bumper Book' is that a lot of what our government does is not only risible but unjust. Investment in the NHS has doubled since 1997. Good thing, you might say. But £56 of every extra £100 has been blown on higher wages and administration. So all the extra money pumped into the world's third largest employer has resulted in almost no improvement in patient care.

We're not the only ones outraged by this. The Office of National Statistics said that the NHS is wasting up to £6 billion per year, enough to pay for 250,000 new nurses.

Then there is the feather-bedding of public sector employees. Last year, salaries in the pages of Guardian Society - the supplement where tax-funded public service jobs tend to be advertised - averaged £35,000. That's nearly one and a half times the average wage nationally. Upshot? Tax money is being transferred from the poor to the rich. And from wealth-creators to wealth-consumers.

Of course, creating a client electorate makes sense for the party in power. As George Bernard Shaw said, the government that robs Peter to pay Paul can always count on the support of Paul.

Here's the bit that really hurts, though - not only do taxpayers pay through the nose to keep public servants in work; they also pay through the nose when they prefer not to work. Absenteeism is 50% higher in the public sector than the private sector. And taxpayers also pay through the nose when public servants stop working. Public service jobs account for 18% of all jobs by head count, but consume 36% of pensions. Their lucky incumbents retire earlier and benefit from generous final salary pensions.

Does the government have the guts to confront this inequity? Of course not! Caving in to the unions, it went back on its promise to reform, and has ensured that generations to come will pay for our bloated bureaucrats.

Ordinary working class people, meanwhile - on modest salaries and meagre private pensions - will be taxed to pay for those on the other side of the fence - the cosseted, public sector class.

This is the source of the real anger that The TaxPayers' Alliance sees in its rising number of supporters. Members of the general public no longer believe that politicians and civil servants are capable of providing value for money. Rather, they recognise that government grows inexorably, demanding more and more, yet giving little in return.

In the end, all we can do via government programmes is steal from each other, ending up in the peculiar situation where we start paying income tax on wages that are £10,000 below the official poverty level!

So the government takes the money, passes it through its well-paid staff's hands, and gives it back to someone who is poorer than they were before.

That creates dependency, poor people who cannot learn how to get richer because they don't have their own money to make their own choices.

Were we allowed to keep more of our own money, in the belief that a low-tax economy is more productive, Britain would be more creative - and, yes, more just.

Matthew Elliott and Lee Rotherham

Editor's Note: 'The Bumper Book of Government Waste', published by Harriman House, contains a department-by-department analysis of where your money is spent, and how much is wasted on extravagant and useless projects, with numerous examples.

Written by Matthew Elliott and Lee Rotherham of the TaxPayers' Alliance, this book's revelations will make your blood boil, and provide plenty of ammunition next time someone tells you that taxes should be higher to pay for "better public services".

This article first appeared in The Daily Reckoning.