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IR35 client not toeing the line: What would you do?

I have a client who is, in my opinion an IR35 case but client does not agree with this.

Client invoices his client through the Ltd Co. 

The limited company also owns 2 UK properties.

Client will not prepare their books under IR35 regime, but instead puts every claimable item through his book-keeping and expects a full tax deduction for it.

Client has "employed" his wife to manage the 2 rental properties (at £20K a year) and is putting her wage through his Ltd Co under the rental property cost center.

Further, client has just leased a car for him and a car for her, hers going through the rental property cost center and his going through his cost center.

How would you deal with this client, when they are clearly claiming for items that would not be allowable under IR35?

I had thought of getting the client to sign a disclaimer stating that I had advised an IR35 approach but would operate on the clients instructions providing they indemnified me against all outcomes.

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15th Mar 2012 14:52

If you believe he is misdeclaring his income then

should it be reported (a disclaimer would suggest that he is fully aware that he is IR35 but has chosen not incur the respective tax impliations)?

 

That said, have you got all of the facts (both the contract and what actually happens) - at best there is usually one or two things that would suggest self employment so unless specifically instructed to advise on this particular area perhaps its best to leave well alone unless the client instructs you otherwise.  Remember you work for the client, and whilst you may feel he is on 'dodgy' ground, it probably won't be the last time you have to decide on the treatment of something in that 'grey' area, so as long as the client feels confident that he is outside of IR35 (based upon what he understands of the legislation and how he works with his client) and understands the consequences of a challenge from the Revenue I think you have done your job. 

 

 

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15th Mar 2012 18:12

What is your understanding of IR35?

IR35 requires a company to pay out 95% of the company's income from clients in respect of personal service rendered by a major shareholder as if he were an employee of the client to that shareholder by way of personal expenses (travel, etc.), er's NIC and salary.

It does not apply to the property rental income, so if there is enough rental income to pay the wife a salary of £20K a year plus the rental on her car, the company is absolutely free to do so.

The rental of the car for the husband would probably be allowable as personal travel expenses of the husband to be deducted from the company's personal service income before calculating the salary that must be paid to the husband under IR35.  If so, it would be fully deductible from the company's profits.

Presumably, both cars are being reported as benefits-in-kind on forms P11D.

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By cfield
16th Mar 2012 12:15

Two separate issues

The OP appears to be mixing up 2 separate issues here. First IR35, then the tax deductibility of expenses.

Re IR35, I think we as accountants must beware of telling clients what their employment status is when we cannot possibly know all the facts. After all, we do not know all the ins and outs of their contract, or their relationship with the end user. The only time I would ever insist on a client abiding by IR35 is if it was an open and shut Friday to Monday case.

For the others, I would just tell them the relevant facts and the possible implications and let them make up their own mind. I get all my contractor clients to sign a form each year stating how they wish to deal with the IR35 issue, ticking the relevant box. I also advise them to do a self-appraisal when they begin a new contract weighing up all the various factors, both for and against, and arriving at a conclusion. At least that shows they are not ignoring the issue, which could be vital if they ever did fall foul of an IR35 ruling.

I know there could be MLR implications, but for most people the IR35 position is so grey/borderline that there can be no question of any dishonesty. For example, if someone genuinely believes that they are outside IR35 and it is reasonable for them to think that even though they might be wrong, then in my opinion there can be no comeback on the accountant for doing their accounts on that basis and not reporting them.

Re expenses, corporation tax is unaffected by the IR35 issue (apart from claiming back any Deemed Payment). You don't disallow valid trading expenses just because they wouldn't be allowed under IR35.

Spouse wages of £20k for running 2 rental properties is a different matter. Unless she actually did regular work, like collecting the rent or cleaning the house, I would definitely query that one.

As for the leased cars, if made available by the employer then they are  taxable benefits, simple as that, and should be reported on P46 (Car) and P11D. However, the company can claim all running costs apart from fuel (or 15% of the lease rentals if over 160 g/km).

However, only business mileage at the approved fuel rate can be claimed on company cars against IR35 (that is if the client actually complies) assuming the assignment even qualifies as a temporary workplace.

Chris

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16th Mar 2012 05:04

good last post

The last post made all of the posts I was going to make, possibly excepting one.  In addition to what Chris mentioned, in my annual close out letter I spell out:

1.  The additional tax payable if the contract is deemed within IR35.

2.  The additonal tax payable if "income shifting" under settlements legislation can be shown.

I also indicate to what extent these 2 numbers are mutually exclusive, if any.  When I take on any such clients we run through all the things I would be doing in his / her position to minmise and mitigate these risks.

So far, admittedly, when I've dicussed the contracts operated with clients I've been confident we can mount a robust defence of an IR35 challenge.

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We are indeed in an impossible position ....

when you look at the recent case of the lady who worked 35 hours per week for the airline client the whole thing hinged on the fact that (a) Her supervisor didn't really understand he work and (b) She was sent home when the computers went down. Otherwise, she failed just about every test put forward by HMRC but yet the courts found in her favour. I think the only approach that is sound is to follow the advice of the previous two posters ... and get the client to insure their contract through Accountax etc if it really is that close a call.

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16th Mar 2012 10:26

I forgot that one - yes any client running these sorts of risks I very strongly recommend to insure themselves.  My whole client base is insured, but in my view for "IR35 risk" clients it's a no-brainer that the premium is good value.

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16th Mar 2012 10:48

professional bodies should provide guidance

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By cfield
16th Mar 2012 11:33

No more "guidance" please

I think the professional bodies already provide too much so-called guidance. They even tell us what to put in our engagement letters, which are basically private contracts and should be nothing to do with anyone else.

We're all professional people. I think on an issue like this we can make our own minds up, thank you very much. We don't need the ACCA or ICAEW telling us what to do.

They tend sometimes to be swayed more by politics and how the profession is "seen" by the public than act in the best interests of their members.

I'm sure on the issue of IR35, when push comes to shove, they would be telling us to report absolutely every client who could conceivably be affected, just to cover themselves.

Chris

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16th Mar 2012 12:06

only for standardisations sake as a result of grey area mentioned above

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By JasonN
16th Mar 2012 13:13

Many Good Replies!

I've enjoyed reading the answers above and its pretty much where I am at. I don't wont to lose fees just because some clients are borderline and I think the client signing a note to the effect of indemnifying the accountant against any subsequent actions is a good plan.

In my engagement contract it states words to the effect that it is the clients obligation to comply with all vat and tax law and it is their duty to familiarise themselves with their obligation and to carry this  obligation out, whether or not an accountant is employed. I have a few other "catch-all" clauses another being that if they undertake their own book-keeping they accept all risks related to it and any reliance put upon it.

 

I feel happier with my IR35 case, thanks to all for your answers..!

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By ringi
16th Mar 2012 13:45

Often accountants understood IR35 less than contractors

When I was contracting I found that most accountants understood IR35 less than a lot of contractors, so for the IR35 issue I think you should just inform them of the risk in writing and point them at www.shout99.co.uk and http://www.pcg.org.uk/cms/index.php as well as the HMRC guidelines.

Contact review services from the like of www.egos.co.uk/ir35.htm may also be worthwhile for the client.
 

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16th Mar 2012 14:20

Letter of Rep

My plan of action for clients who may be caught, i.e. those with only one client at a time and working on contracts lasting more than say 3 months at a time, is to highlight IR35, give them a brief run-down of the criteria for being caught and the repercussions, and refer them to QDOS or the like for a contract review if they're uncertain.  That's the end of my involvement.  I always leave an email trail of these discussions, so there is evidence on file as to me highlighting the potential issue and clearly passing the onus onto the client to take further action themselves.

When it comes to the annual accounts, all clients sign a letter of rep, one of the points will be an IR35 disclaimer which I insert for clients that I'd identified as maybe liable.  As part of my accounts prep process, I don't check contracts nor working practices, so I regard checking for IR35 as being outside my remit.  You can't even begin to second guess whether a client is caught or not just by looking at their book-keeping records.

In fact, a recent tax enquiry has given me comfort as to my approach.  The client in question was, looking solely at the book-keeping, a dead ringer for IR35.  No equipment on the balance sheet, no PI insurance, not even any office costs - just accountancy and travel.  He'd been working at the same place for over 2 years (and rightly stopped claiming travel when the 2 year rule was breached).  I'd had the usual discussions from the outset re IR35, and not only did I get a letter of rep signed each year, I also mentioned IR35 2 or 3 times over the 2 years as I had him down as probably the client most likely to be caught.  

A couple of months ago, we got the dreaded tax enquiry letter asking for a sales analysis.  I started to worry about it but the client was very relaxed.  We sent the analysis and copy sales invoices and inevitably we got back a response asking about why IR35 hadn't been applied.  Jumping the gun, I emailed the client to warn about the likely PAYE/NIC liabilities, etc., and asked for whatever information they could give me to counter the IR35 argument.  

Client then sent me a pile of paperwork and copies of various emails between himself, the agency and the end client.  A quick look through it, and it was absolutely clear that IR35 couldn't possibly apply.  Not only was there a substitution clause, but it had been invoked ad there was documentary proof that a substitute was being sent for a 3 month period - in the end this didn't happen as the client's circumstances changed and he could do it himself, but we had the proof.  Same with remedial work - loads of documents clearly showing that a lot of extra, unpaid, time had been spent on one element of the project that had been badly screwed up by our client.  There were other aspects as well, and all told, a cast iron, not caught by IR35 case.  

What a fool I'd have looked if I'd started getting too strong, starting to give warnings of not being able to act, or even worse, reporting them under the ML regs., etc.

 

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By cfield
16th Mar 2012 15:12

Contractors knowing best

The last 2 posts highlight my argument that contractors know their contracts better than their accountants, so are in the best position to judge - provided they've been advised properly.

Mind you, if Ringi found that most accountants knew little about IR35, it might indicate that he was using so-called "contractor specialists" where for a knock-down fee the client does all the work himself and merely has an accountant "on hand" to "answer" any questions.

Real accountants who keep their CPD up-to-date know all about IR35.

Ken's story is good to hear as it shows contractors do take the risk seriously and take steps to mitigate it. Use of own equipment and the incurring of other costs are usually only ever a minor factor in an IR35 review, as generally it is only contractors who are obliged to work on-site that are at risk anyway.

The other factors such as control of the work and financial risk (if present) have always been more important - the very things we can't tell just by looking at their accounts.

In fact, it might be a good strategy for contractors to screw up on purpose sometimes, just to prove they had to re-do the work in their own time. I'd never thought of that one! Must suggest it to the next contractor client who comes along :-)

Jason, I'm not sure your clause about clients being responsible for their own tax would work, as most clients specifically hire an accountant to look after that for them. It would probably be seen as an implied term of the contract, whatever the letter says, especially as you would in practice be managing their tax anyway.

As for the indemnity, the accountant is not really exposed to a financial risk anyway apart from the MSC legislation, which would not bite for an accountant with a well-rounded client base as it is aimed at MSC providers.

It is the MLR risk which is more relevant for us, but even this is very unlikely given the uncertainties inherent within IR35. And if it did turn out to be an issue, I don't think an indemnity would help. After all, a client can't indemnify you against a prison sentence, or against losing your practising certificate.

Chris

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16th Mar 2012 15:26

unfair contract terms act?client should explain why ir35 does not apply

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By JasonN
16th Mar 2012 15:40

sorry Chris I used the term "tax", should have said "book-keeping"...the argument being that i can only act on their final totals (if they do the book-keeping) and as such, if they prepare their books believing they are not liable under IR35 and subsequently HMRC disagree, then I have acted in good faith and been indemnified by the client.

If on the other hand I had been involved in their book-keeping then the argument as to what was claimed and what wasnt becomes a little more involved.

 

I agree with the general thoughts here, warn the client in writing and by email, point them to IR35 resources (HMRC's as well) and then get them to sign something to agree how they wish to be treated and at their own risk.

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16th Mar 2012 16:39

It's not your problem

It is the clients responsibility of deciding their IR35 status, not the accountants. IR35 status relies on employment case law, which is extremely complex and often changes. Decisions on status are best left to lawyers and judges.

Many accountants in the contracting industry ask their clients to sign engagement letters to indemnify them regarding issues on IR35 status - and it would be worth you enchancing your terms to specifically point this out.

Your client could also start by using our free Online IR35 Test on ContractorCalculator, which was built in conjuntion with Qdos (who provide expert help on IR35 matters). You could ask them to make sure they check their status, then inform you accordingly. You'll then have a record of them categorically stating their choice.

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16th Mar 2012 17:03

MLR risk (or not)

I have to say that I do not think, in the context of IR35 issues, that MLR is a significant problem.

A report under s330 PoCA 2002 / MLR 2007 can be required where the accountant suspects (for example) that his client has dishonestly evaded tax and thereby obtained a benefit (by side-stepping his true tax liability).

But "dishonestly" is the key word here.  If the client genuinely believes he is complying with the law then (even if he is actually mistaken in that belief) a report under PoCA / MLR is NOT required.

So if you advise the client that in your opinion IR35 applies to him and his opinion is that it does not (and therefore he does not operate it) that does NOT trigger an obligation to report under PoCA / MLR.

David

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19th Mar 2012 11:49

Bottomline

 Is he IR35 or not I tell the clients they must make up their own mind and decide and that if its wrong they will get hit for extra tax and that I cant express an opinion as its too complicated and maybe they should talk to a tax barrister. Bottom line You dont want to be sued by him so a disclaimer in the letter with his co accounts each year prettymuch covers that. point him towards hmrc website....

Also, why are you letting him put company cars through....totally not tax efficient and also why is she getting a salry again not tax efficient, she should be a joint shareholder and take dividends ( remember no S660 on this)

Is he on flat rate vat? If so does the house rent get caught for vat  or is it exempt  I cant remember, but worth checking as most of tyhese guys are on flat rate vat

 

Good luck Tom

 

 

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