Accountants' IR35 knowledge ‘worryingly vague’

I have just read Duncan's article with interest, and agree that this is an area where specialist advice should be sought.  In particular it is essential to ensure that your client's contract does not cause them to have "employee" status.  Also, just as important is to ensure that the working relationships actually mirror the terms of the contract, or else HMRC will rightly simply state that the contract is a "sham".

Of course I am biased, but I would recommend all accountants and tax advisers who are not specialists in this area to contact a PCG accredited firm, as they will have had rigorous training on IR35.  Further information on such companies can be found at www.pcg.org.uk and MG Contractor Services does actually provide a service to other accountants and tax advisers where we review your client's contracts to determine IR35 status.  We charge a fixed fee of £150 + VAT for each written review, but you are free to charge your client whatever you like.  Further, in our engagement letter it is clear that we cannot "take over" the management of the client, so there is no risk of the client moving from you to us.  Also, the report we write can be branded in the accounting firm's own name. Please contact me if you require further information or details on this!

-- Gavin Fernandes ACA, CTA - www.mgcontractorservices.co.uk PCG Accredited Accountants

Since contractors are generally directors of their own limited companies and the Revenue is actively seeking to curb large dividend/small salary remuneration packages, the potential tax saving by avoiding IR35 may not be so great in the future.  In the higher tax bracket the dividends are hit hard by personal tax anyway; so it is the National Insurance that is the bugbear;  compensating on the side of salary as opposed to dividend National Insurance payments are allowable against Corporation Tax.  Big deal, you might say, but again if dividends are curbed paying more National Insurance will be unavoidable, so we can be thankful for small mercies.

I would be interested to see the workings that resulted in the conclusion that a contractor would be £800 month better off.  Presumably this is with a very high dividend, and very low salary, the norm now, but maybe not for long.

On the expenses side, even if you don't technically fall within IR35 presumably if you travel every day to the same address to work over an extended period, and don't do very much at your "home office"  it could be argued that your client's address is your main place of work, rather than your home, so the travelling, which is probably the biggest expense, could still be disallowed, even without invoking IR35.  And of course legitimate expenses incurred solely for the purpose of carrying out your job are allowable against personal tax, as an employee either of your own or somebody else's company. 

IR35 - possibly one of the most badly written laws to pass through parliament. Way too much grey area that also changes one way or the other depending on how the most recent court case goes.

Great to see another article on IR35, thanks for this.

But in my view its not only some accountants that are ignoring IR35. Certainly some contractors do ! More worryingly I think that Recruitment Agencies and Clients tend to ignore it , with the view that its the contractor's problem.

This maybe true enough, it is the contractor's problem. But more recently cases where an Inside IR35 contractor has decided to make employment rights claims against the end client means that both Clients and Recruitment Agents need to wake up to exactly how contractors can be engaged in a manner that works for all parties and is demonstrably outside IR35.

This would save end clients from problems with employment rights and also mean happier contractors who are living their ideal of being a freelancer in the truest sense of the word.

If clients and agencies educated themselves better as to how engagements outside IR35 can be organised then the IR35 legislation will do its job anyway and true freelancers and contractors will be outside and employees will be inside.

It is possible to understand IR35, we have launched a video series at http://www.bfca.tv , which takes you though the basics, certainly enough for clients, agencies and contractors to be able to see how an engagement can be safely arranged.

Phil Richards

Is the government going to bring forward such controversial legislation when there is an election within the year?

My client has stated they are outside of IR 35 (I think they may be too) but rather than £6k salary and £60k divis, they are taking a modest £20k slary and the remainder as dividends. Would HMRC look at this as OK?

I'm afraid that generally the political aspect of IR35 is ignored and as such a political approach to HMRC is also overlooked.

IR35 was always a spiteful Socialist tax and if contact with HMRC is undertaken with this understanding and suitable action is employed, perhaps a different result would ensue.

It is a fact that no one person for the same engagement, has had a different judgement of their employment status from both the ET and the Commissioners. On that basis, the legal system would be embarrrased should such a decision be given, which is unlikely. So the way to tackle HMRC when challenged under IR35 would be to immediately apply for an employment status judgement in the ET, or perhaps just threaten this. The inspector would have to then assess the resultant risks of such proposed action.

Yes, there is a time limit for lodging cases in the ET. But this time limit can be extended given good legal grounds. What better legal grounds that to use a judgement in the Commissioners Court, should that judgement be "caught" under IR35.

It's no good playing HMRC's game on their field with their ball and with their referee. We all should short circuit the system (as I have done with good results) and not play their game. Another example, if owed money by HMRC, don't beat about the bush, take them to the Small Claims Court. "you can't" I hear someone say, yes you can, as even if they are exempt, they will still have to enter this as a defence and appear in court to deliver that defence.

The expense for them could be greater than what is owed and so the monies are likely to be paid. Additionally, the case may be heard in front of a maverick judge and there would always be a risk that a legal mistake would be made and then this would have to be resolved by a higher court, so increasing HMRC's costs.

" They wouldn't worry" I hear you say, they would if you then complained to the Parliamentary Ombudsman - they don't like this. Let's not give in to HMRC, but use the system against them! They have no scruples about intinidating the taxpayer

But sadly Accountants are part of the establishment and won't rock the boat!

I couldn't agree more with the views set out in Duncan's article ably backed up by those of Phil and Gavin.

Our firm has operated for a number of years in the contractor/IR35 market and have taken a lot of time and effort to get accredited by the PCG (Professional Contractors Group). As a result we have a number of general practice accounting firms who refer IR35 (or potential IR35 clients) to us. The implications of ignoring IR35 are self evident. Equally thinking the worst and assuming that IR35 does apply may be depriving clients of thousands of pounds of additional income.

The issues associated with determining the applicability are often clouded by the presence of a third party (ie the agency through which work is obtained) and of course actual working practices may not be in line with the written contract.

In my view firms are faced with a choice - either take the time and trouble to undertake the research and training necessary to feel comforatble that they can deal confidently with these cases OR... refer these clients on to one of the industry experts such as ourselves who deal with IR35 issues on a daily basis.

I'd be very happy to talk to anyone who would like to enter into a referral arrangement with us - we do pay generous introduction fees!. If you'd like to find out more please do give me a call on 0845 293 0233 or visit our webite at www.ir35accountant.com.

Nigel Simmons FCCA

It is quite right to highlight the porblem, but professional advisers have been thrown a googly by the Dragonfly case.  This decided that someone was within IR35 on the basis of a contract that the contractor had not seen and had no access to (the contract between the agency and the client).  On the basis of the contract between the agency and the contractor's company he would have been safe.

All that one can really say in the circumstances is:'We think you're outside IR35 on the contract that we have seen, but we can't be sure because of this other contract that we and you are not allowed to see, and we don't know what it says.  So carry on operating outside, but beware that if investigated it may turn out that there is extra tax to pay.  And don't sue us for bad advice, because this extra tax comes from something that we don't know and can't know about.'

That isn't really very satisfactory, but (other than putting it in more diplomatic language), what else can one do?

i quote

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"The aspect of the rules which will probably be of most interest and relevance to you is the “24 month rule”. This rule will be applied by the Inland Revenue to effectively turn a temporary workplace into a permanent workplace. The rule states that a workplace cannot be a temporary workplace if the employee attends it in the course of continuous work which lasts, or is likely to last, more than 24 months."

have a look at the SITE-BASED employee exps rules...

we do 20k salary as it is only reasonable to draw a living wage. And HMRC seem to acquiesce in getting their kilo of fleisch.

it is pathetic that they keeop droning on with rules instead of calling a spade a spade and devising clear rules to follow.

Thanks for a great article, Duncan.

I wholeheartedly agree that IR35 is potentially a huge can of worms.

Just recently I've been discussing on my blog at http://askm-videos.blogspot.com/ why I think the UK's tax system needs a gigantic overhaul and simplification.

Wouldn't scrapping National Insurance and increasing the rates of income tax and corporation tax to compensate, as other commenters have suggested before on AccWeb, neatly remove not only a huge amount of admin, but also the IR35 issue (no employer's NI to consider) and the low-salary high-dividend conundrum?

Does anyone else agree a) that the UK's tax system does need a grass-roots rethink and b) that scrapping NI and increasing IT and CT to compensate would be a good place to start?

M

Along with many other people who work at the coal face of tax practice I have long held the view that scrapping NI would be a great move.  Just think about it.  One income stream subject to one tax instead of two.  No more worrying about whether income is NICable or not.  And coming back to the theme of this article, a much closer call for those engaging personnel.  Suddenly it might be better to recruit employees rather than sub contractors.

With all these plusses why hasn't it happened?

Probably economics.  I don't have the figures but I suspect the loss to the Treasury from abolishing employer's NI would far outweigh any gain from increasing corporation tax.  Profits are internationally mobile.  Workers, generally, are not.

It ain't going to happen.

It makes sense to streamline taxation, alas our governments have seldom shown an excess of common sense over the decades. You will recall Ken and Lester being the forerunners of paying what they regarded as a fair rate. There is of course the added danger that "one tax" will open the gates for robust abuse by HMRC. We can all remember the increases when our beloved Euro burst upon the scene. I favour no free pay/allowances. And a scale rate of:

£0> £7,500  - 0%, £7,500 > £19.999  -10%, £20,000 > £39,999 - 20%,£40,000 > £49,999 - 25%,

£50,000 >£59,999 - 30%,£60,000 > £79,999 - 35%, £80,000 > £99,999 - 40%,£100,000 > 45%

I welcome Duncan's article on IR35.  He and those of you who have replied recognise that however poorly constructed the legislation may be and whatever we think of it as a method of extracting tax and NICs, it is still with us 10 year on.  Perhaps you have not been investigated yet, but HMR&C is still on the warpath and will have been greatly encouraged by the Dragonfly case last year.

Duncan, you are right to show the key areas of concern and although I agree with what you say about Control and Personal Service, I think there is still confusion over Mutuality of Obligation.

There is more than one meaning to these words - and in particular the meanings for Tax and Employment Rights differ.  In a nutshell, it matters not to the Tax Tribunals whether there are on-going obligations - they are satisfied if there is a proper contract in place and that the contract is for personal service.  So, for instance, a supply teacher may work in a school, replacing an employed teacher for just one afternoon, but under the terms of the contract there are mutual obligations for those few hours, sufficient to satisfy the tests set out in tax case law.

For Employment Rights there is the added requirement that there must be continuous employment throughout the qualifying period.  This is not needed for tax purposes - they are only concerned with what happens on the occasions when work is actually being undertaken - not what happens in between work periods.

Anyone wanting to study the subject is greater depth and understand where HMR&C and other tribunals are coming from should refer to my article on our website www.inspiredemployer.co.uk 

Steve Gretton