IR35 is tax legislation, first introduced in April 2000, that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a Limited company, but who would otherwise be an employee if the intermediary was not used. These workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC) and can be subject to an IR35 investigation as a result.
In April 2017, Government reforms to IR35 meant that the responsibility and liability of IR35 passed from the contractor to the employer (or party paying the contractor). This means the employer has to assess each engagement and make the decision as to whether that engagement is Inside IR35 or Outside IR35.
If the engagement is Outside IR35, the contractor can continue to remunerate themselves at their own discretion, although the employer could face the bill if the decision was questioned and overturned by HMRC.
If the engagement is deemed to be Inside IR35 the employer will have to deduct PAYE and NIC prior to paying the contractor, from any income moving forward. The contractor will still operate through their own PSC and will be taxed as an employee, which results in all the revenue received as net income to the Ltd Company.
Various tax credits are in place to ensure the contractor does not pay twice once the income comes in the PSC, although this can become complicated hence we would recommend seeking the advice of a specialist Contractor Accountant.
Potential for Private Sector IR35 reforms
The 2017 reforms were applicable only for Public sector workers, not clients operating in general businesses. However, it is widely expected that the reforms will be rolled out into the Private Sector, although a specific date has not yet been confirmed. The fear is this will scare agencies and end clients into making rash decisions on employment status that could damage the UK’s economy.
In light of the recent tribunal that HMRC won against former BBC Look North presenter, Christa Ackroyd, who worked for the BBC on a personal service company contract, meaning she was self-employed and using a Limited company rather than being directly on the corporation’s payroll.
Using a Limited company meant that Christa Ackroyd was entitled to tax breaks, meaning she paid much lower tax and NIC payments. However, in 2013 HMRC demanded unpaid taxes because it said she was an employee of the BBC and not allowed the tax breaks. Ackroyd lost her appeal against HMRC – which is demanding over £419,000 in income tax and National Insurance contributions as a result.
It is advisable for you as a contractor to assess whether or not you are deemed to be Inside or Outside IR35.
Here are 5 key tips you can follow to help confirm your IR35 status and potentially avoid a backdated tax demand:
1. Consult qualified lawyers for advice
If in the event you are subject to an IR35 investigation by HMRC it is recommended that you handle all correspondence in writing, rather than in person, with specialist guidance from an employment lawyer to ensure your answers to any questions do NOT incriminate you in any way.
2. Ensure all key witnesses are briefed and summoned
Anyone who can support your case during an IR35 tribunal MUST be summoned and fully briefed by your lawyer. HMRC will NOT be inclined to deliver a balanced outcome and as a result will overlook potential sources if it is in their best interests to do so.
3. Be aware of control via external documents and procedures
You MUST consider more than the contract when assessing IR35 and your role within the organisation you will be working for.
4. Avoid contracts and agreements that specify minimum hours/days as it implies MOO
MOO (Mutuality of Obligation) should be avoided at all costs. Any agreement that insists on a minimum number of days/hours per year/month is a clear indicator of MOO. Contractors and freelancers usually work on a project-to-project basis and usually receive payment for work when it is completed. The engagement with a particular client or organisation ends when the project is complete.
Where possible try and agree a schedule of work and a fixed price agreement for the work. This then shows that you have agreed to defined milestones and terms and if they are not met you will stand to suffer financially, like other businesses do when they enter into contracts.
Beware of retainers – The word Retainer is akin to employed because it is a term used as a payment for staff that are paid whilst being between projects, who are then paid more when they are engaged on a project.
It can be difficult to assess what a retainer actually relates to, is it a day rate, is it a monthly sum or is it a base holding fee to keep a contractor engaged? Under the MOO rules it states that you shouldn’t have either party compelled to offer or accept any future engagements which would suggest that a retainer does breach that rule and in-turn place a freelancer or contractor who is retained Inside IR35.
5. Have your contract/agreement assessed before you start any work
The temptation as a contractor to sign an agreement immediately is great as it usually assures you of income in the near future. You can virtually guarantee your protection from IR35 by getting your agreement assessed by a professional before you sign and start work. This is a relatively inexpensive process and could save you £000s and a lot of undue stress further down the line.
What other options are there?
• You can decline the contract and seek work which is not subject to IR35.
• Work as an employee rather than a contractor. You would pay tax and NIC as an employee, but you would be entitled to the same rights and protection of an employee.
• Opt to join an umbrella company, or have the funds paid to your PSC, so that you don’t have to incur two costs for two services that may be running at the same time.
• Insure yourself against heavy legal fees as the result of a tax enquiry with IR35 insurance products.
ACT NOW – Whatever your position, you should act now to assess your exposure and consider any action where necessary. If you are subject of a tax enquiry it may cost you a lot of money, so it is a good idea to take out a Tax Enquiry & Legal Expenses insurance policy to ensure any legal fees would be covered in the event of an investigation and tribunal.
Special thanks to David Hughes of Accountants 4 Contractors for his expert opinion and assistance when writing this article. For accountancy and taxation advice you can contact David at Accountants 4 Contractors on 07917 822804 or email: email@example.com