Share this content

IR35 Accounted for incorrectly

IR35 Accounted for incorrectly

Didn't find your answer?

I have recently taken over a couple of clients who work solely for one client, they are both social care workers and work for 1 authority.

They work set hours, use the authorities facilities and are told where to go and what to do, so they are clearly caught within IR35. But heres my problem their previous accountant had not told them about IR35 and was putting through the minimum salary and claiming dividends rather than putting them through on full salary. Now my client is saying that they should be treated as outside of the scope of IR35. How do i go about this now?

My other question is this... am i right in thinking that anyone that is working solely for one client, that is told where to go, what to do, cannot produce a substitute if needed is caught within IR35? It doesn't matter about what industry they are in, or if they have a contract or not?

Sorry if i am sounding thick but IR35 is really confusing me at the moment as i keep hearing different stories.

Replies (17)

Please login or register to join the discussion.

By ccassociates
07th Oct 2011 17:08

IR35

Sounds like they are caught by IR35 unless the Co can be classed as an agency

What I tend to suggest in these circumstances is to ask the client to complete the ESI on HMRC website, answer the questions honestly and abide by the result.

I have successfully used this approach against HMRC with a client who was contracted as a consultant but was actually a worker.

You dont sound thick IR35 confuses everyone particularly HMRC just look at the cases they have taken on and lost!

Thanks (0)
Replying to Old Greying Accountant:
avatar
By frustratedwithhmrc
10th Oct 2011 09:09

This is a difficulty in acquiring other peoples clients...

ccassociates wrote:

You dont sound thick IR35 confuses everyone particularly HMRC just look at the cases they have taken on and lost!

Given the recently published summary of IR35 investigations per year from AccountingWeb (https://www.accountingweb.co.uk/article/pcg-ir35-completely-unnecessary/519174), it seems that HMRC themselves have effectively given up trying to enforce these impossible regulations.

I wouldn't say there is no risk to taking the view that IR35 should be ignored, but I consider the new BRC (Business Records Checks) regime to be more worrying than IR35.

Different accountants have and probably always will take different views on this and when clients move from one accountant to another there are always bound to be differences in opinion about these things. In light of this, I would be tempted to take the pragmatic view. Provide them with a letter stating that you have explained the issues around IR35 to them and since you cannot provide the detailed and necessary advice on IR35 for them, that they should research this matter for themselves and ideally seek professional advice on this matter.

This allows them to continue being "at risk" with IR35, and you will have covered yourself from a practical and professional viewpoint.

Given the difference in after tax outcomes between IR35 caught and not can amount to tens of thousands of pounds a year it is understandable that clients would take the riskier view and determine themselves to be "not-IR35" caught, even if all of the pointers from HMRC appear otherwise.

In fairness, given HMRC's continual failure to successfully prosecute IR35 cases, you need to treat HMRC's position on this with some scepticism. I have used their employment status indicator and I would argue that it is somewhat biased towards finding people to be employed rather than self-employed.

Thanks (0)
Accountants & Business Advisers
By Gladstone
07th Oct 2011 17:16

Similar situation

 

I have similar situation wherein a new client is under IR35 rules but not prepared to accept that fact.  The trouble is if I insist too much about the validity of IR35 and deemed payment etc etc. he will move to another accountant who may follow his claim.  However I do not want to do things that I think is not appropriate.  I sometime feels that this IR35 saga is a classic example of capitalist bureaucracy imposed on tax payers and HMRC expects all the tax payers to know the rules.

I wait for further adivce on this informative and helpful forum of experienced professionals.

Gladstone

Thanks (0)
avatar
By BKD
07th Oct 2011 21:55

I wouldn't worry about it

IR35 is so subjective, and HMRC have won so few cases (they've lost every one they've taken against my clients, though in truth there have not been that many) - even where it would appear to the man on the street that they should have won - that no matter how damning the evidence, there is no guarantee that your clients would lose. So I don't think you have any reason to worry about non-compliance (and in case it had crossed your mind, there is nothing to report under MLR).

I would simply point out (they sound as though they are probably aware) the potential risks and the scope of HMRC's sanctions were they to make a successful challenge. HMRC have already said that they have bigger fish to fry and will be pursuing only those cases where (a) there is a lot at stake and (b) they are 100% certain they will win. Leave the ball firmly in your clients' court and forget about it.

Thanks (2)
avatar
By andy.partridge
08th Oct 2011 11:34

Agree with BKD

I would add that if you are more conservative about this issue than your client (and the previous firm) you should get your client to sign a statement stating that you have explained IR35 to them and having considered the issue carefully they do not believe they fall within the the legislation.

If, on the other hand you are adamant that they do, and you can not let it lie, you might have to think about whether there is a sufficient cultural fit between you and your client for a healthy and sustainable business relationship. 

Thanks (2)
avatar
By uktaxpal
10th Oct 2011 09:49

in business?
do they work for other clients'do they have a website,do they have business letterheads/cards do they have specialist knowledge?

Thanks (0)
avatar
By marine
10th Oct 2011 13:17

Thanks for all your useful comments...

Can i just ask then how fellow members treat these sort of clients, do you put through a minimum salary (to take care of p.a) and declare a dividend once the client has agreed that they are outside of the scope of IR35. Or i was thinking of putting through a salary of say £ 1000 per month and declaring a dividend just to try and keep the tax man at bay?

Is this something that you guys implement?

Thanks (0)
avatar
By frustratedwithhmrc
10th Oct 2011 13:35

For myself, I'd ask the client about their risk profile

If they are happy to accept the risks associated with IR35 and given that they have given at least some nod towards non-IR35 factors (Mutuality of obligation, control factors, ability to profit from sound management, etc.) then I would have no real argument against PAYE salary at the Lower Earnings Limit provided that they are directors without employment contracts to their own Ltd companies (therefore covered by National Mimimum Wage).

Once profit and loss is accounted for payment of interim dividends each quarter should be sufficient.

I'm aware of the arguments about paying higher than LEL (e.g. notional £1,000 per month) to reduce HMRC risk profile, but it seems to me that clients just end paying more tax unnecessarily.

If clients are very risk averse then they should maintain provisions for costs and corporation tax, but otherwise pay out the majority of income as PAYE salary or operate IR35.

Simple as that really.

 

Thanks (0)
By cfield
10th Oct 2011 14:31

Who are we to judge?

Can we really tell how much (or how little) control the client has over their work, or whether mutuality of obligations exists. In practice, only the client and end-user will know the complexities of their relationship.

For this reason, as far as I'm concerned, only classic Friday to Monday cases are caught hook line and sinker by IR35 (and not even then if the job has changed). Anyone else can easily establish a borderline position.

I always ask my contractor clients to do their own IR35 review when they first start a new assignment, weighing up all the factors both for and against before arriving at their conclusion, and then e-mail it to me. What this does is establish contemperaneous evidence that they carefully considered the position at the outset and did not just ignore the IR35 rules.

Then, even if a tribunal case goes against them many years later, they will only be at risk for the profits retained within the company. As I understand it, HMRC cannot pursue the owner/manager for profits already extracted as dividends if they reasonably believed that they were exempt from the rules.

As IR35 is such a grey area, that would apply to practically everyone who did properly consider the position. However, I don't believe this would apply if all the retained profits for previous years were suddenly paid out once an IR35 investigation had already commenced.

I also ask my contractor clients to sign declarations at the beginning of each financial year stating a) salary and dividend policy, and b) their IR35 policy.

Chris

Thanks (0)
avatar
By marine
11th Oct 2011 12:28

template

I dont want to sound cheeky but... could someone email me a template as to what they would get there clients to sign to agree that IR35 has been reviewed and that in the clients opinion they are outside of the scope.

By the way thank you for all your comments, as this has helped enormiously as IR35 has really confused me over recent months.

Many thanks

Tim

Thanks (0)
avatar
By drakeltd
12th Oct 2011 13:01

A useful link to IR35 information (and history) along with legal case links is available via the PCG (Professional Contractors Group)  http://www.pcg.org.uk/cms/index.php

Other useful links are Accountax  www.accountaxconsulting.co.uk/

and QDOS Consulting  www.qdosconsulting.com/  (which offers an IR35 Insurance package).

I approach the IR35 situation from a different angle, which makes me sleep at night. If your new client is asked the question;

   If you were to be not working, would you expect to receive Welfare State Benefits?

      No - means self employed (and in business on your own behalf) and hence potentially outside IR35

     Yes - means employed and hence potentially IR35 caught
 

I know it's not ideal but it lends a moral twist.

Then it is a case of bolstering the defence to suite the situation. ie

If 'No' then form a Ltd Co, make sure contracts (with the right clauses) are in place, Insurance is arranged, etc

If 'Yes' then go with the flow as the Boss dictates and make sure that pension contributions are being paid, paid holiday is provided, maternity/paternity leave is offered etc. 

 

 

Thanks (0)
avatar
By Roy Price
12th Oct 2011 13:07

IR35 Clients

I have had some instances where in my opinion my client was caught by IR35 and they disagreed: mainly because they see others doing the same and getting away with it.

One client referred to Abbey Tax who will give a cost effective independent review and have a great deal of expertise in field of IR35.

I agreed with my client that if Abbey Tax agreed with me then they were caught.

They disagreed with my view.

My client understood that this can be a matter of opinion and decided to accept the risk of not following IR35.  It is also important that each contract should be examined in its own merits.

I felt I had done my professional job.  I did not ask them to fill out any forms I have formal letters to the client on hand plus email traffic.

It is important to ensure the client fills in the P35 return correctly with regard to the service company question and also their Self Assessment tax return (TR4 section 1). They sign both documents and thereby take the risk.  They also sign the accounts and corporation tax return and take the risk.

I have not lost the client.

If one takes on a client and a previous accountant has done something incorrect then the situation needs to be remedied and voluntary declaration made.  The client can take the matter up with the former accountant - e.g. make a claim for the additional costs incurred together with penalties and interest in correcting the situation.

Thanks (0)
avatar
By uktaxpal
12th Oct 2011 14:26

explanation
Perhaps it is worthwhile asking your clients to review the literature on ir35 and then write to you explaining why they think ir 35 is not applicable.

Thanks (0)
By Steve Holloway
12th Oct 2011 16:15

Social care workers?

I though they earned pretty much minimum wage .... hardly candidates for incorporation I'd have thought!

 

Re - only being eligible for retained profits. Sadly not the case. All is unwound with deemed payments calculated with payment dates of 05.04 in each year. It is very unlikely that dividends could have been voted correctly and therefore would be deemed invalid and substituted as part payments of the deemed salary. I think the crux is that EES & ERS NIC will be payable on income earned under IR35. Personal and corporation tax returns would have to be re-calculated and re-submitted. 

That's why cases can easily have £60 - £100k at stake for the unlucky contractor.

Thanks (0)
avatar
By uktaxpal
12th Oct 2011 16:42

penalties?
good point .Dont forget penalties and interest.

Thanks (0)
avatar
By lme
13th Oct 2011 10:33

CCH also do independent review

I agree with much of the above. I keep email and letters as evidence of consideration. CCH offer an independent contract review that I have found helpful and cost effective.

May be I am burying my head in the sand but where a previous accountant allowed a different treatment, if there is any room for judgement I don't tend to assume the previous accountant made an error, but rather that they came to a different treatment. So unless categorically wrong, I would not necessarily seek to correct a prior position. Sometimes when you look into the detail it all gets quite complicated and its possible that a different accountant would have had a different opinion. I draw the line on my own comfort level which might be more prudent or just different to some other practitioners. Interested what other people do when previous accountants have given a different view / possibly made a mistake.

Thanks (1)
avatar
By Jakeson
28th Nov 2011 11:49

Review of the Contract

 

Contract is one key factor where the HMRC will look into for compliance with IR35. Needless to say that prior to signing the contract, a review by experts must be done to warrant compliance to the legislation or, ideally, to establish that your contract is outside the realm of IR35.

There are four key areas to check in the review of the contract. First thing, the parties involved. The contract should be between a limited company and the client. It is nowhere that the contract can be between an individual and the other party. Otherwise, it could be treated as a direct employment.

Second is substitution clause. Included in the contract is the prerogative of the contractors to send any representative to accomplish the task on its behalf. It is blunt to say but the client cannot demand for someone to do the job.  

Third is the signature. Again, the agreement shouldn’t be between an individual and the company. Thus the signature should be in behalf of the company, not by the individual and the client.

Lastly is the employment clause. In the course of performing the job, contractors shouldn’t perform like a regular employee where there is a need for adherence to certain company policies such as scheduled breaks, time-in and time out and so on. This is to include that the contractor cannot use client’s resources to perform the job.

Thanks (0)
Share this content