IR35 - tax opinion

IR35 - tax opinion

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I had a new client meeting and raised IR35 as an issue.

Two IT contractors have set up a new Ltd company and will provide services as follows:

i) IT services working together: they believe they have a USP in their IT services, many interested clients, a website and it is a genuine business

ii) Work for former employers: they are also leaving full time employment and will contract for their old employers for a few days a week while they grow their business.

I think there are good arguments for i) to fall outside IR35 as they will work for different clients and can choose their own hrs, who does the work etc

However there is a higher risk of ii) being caught by IR35 if they go straight back as a contractor to each of their former employers through the Ltd co.

I was going to start by sending them some questionnaires and then assess the risk, don't really want to give away the work.  Then look at the guidelines, case law and form a view and advise them (with a tax opinion), although don't know how much to charge to reflect the significant risk to me! 

Or should I refer them to an expert for an opinion since this is such a grey area?

Thanks

Replies (11)

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By Sarah K Dunks
07th Apr 2013 18:48

Contract review
In my engagement letter I say that it is their responsibility to review if their contract falls within IR35. As accountants we are not aware of their work practices on a day to day basis and so cannot make an accurate judgement. I suggest to clients that they have a look at PCG or Qdos who can perform reviews and provide insurance for a reasonable price. All we can do is point them in the right direction, ensure that they now the tax implications but cover ourselves as well!

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Chris M
By mr. mischief
07th Apr 2013 19:59

other points

Both Qdos and PCG very good.

For all at risk clients, I give them as part of my accounts review:

1.  A calculation of the extra tax due if IR35 was successfully applied to the contract by HMRC enquiry.

2.  A scorecard of pluses and minuses for the year in question which in my view helped them stay out of IR35 or put them more at risk, and I invite them to supply more.

The idea here is to build a year by year record of aspects SPECIFIC to my client which can be used by me - or client tax investigation insurer - to give a speedy and very robust response to an initial HMRC letter, hence persuading them to go elsewhere to pick lower hanging fruit.

For example:

"In July 2012 there was a delay to project funding.  Although all the employed client staff continued to work on the project and receive salary, Neil X and the other contract staff were stood down."

So this would be a specific incidence where for this client I can show that prima facie an ongoing relationship did not exist between my client and his ultimate employer.

Although the main aim of this stuff is to manage the risk for my client, in my view this annual written record between us of the IR35 issue also gives me some protection if the client were to get a nasty IR35 challenge and look to throw the blame around.

 

 

Thanks (1)
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By sparkler
07th Apr 2013 20:02

Specialist advice

I would always suggest to clients potentially caught by IR35 that they seek a specialist contract review to determine whether they are caught by the legislation.  AbbeyTax are good, as I am sure are others.  Also, a specialist contract review service will then be able to supply insurance to cover any eventual tax loss, if the contract is deemed to be outside IR35.

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By ver1tate
08th Apr 2013 00:34

I had a client, a personal friend, who was self employed, but gave this up as his income was not great, and one of his friends advised him to seek employment through an umbrella company. He did this, but finds he is being charged both employer AND employee NI. Also, he feels that he is not being taxed on his expenses correctly. these are being deducted from his wages, the resultant sum then being used to calculate tax and NI, and then expenses added back to his bottom line. 

I have never heard of a person being liable for both employer and employee NI, and though the method used to calculate deductions for his expenses is of benefit to him, I feel that the tax deduction is too low and an HMRC enquiry will probably find him guilty and not the umbrella company.

Any one met this before, or can advise me?

 

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By Sheepy306
08th Apr 2013 00:50

@ver1tate
The scenario you describe with your friend is fairly standard practice for an umbrella company. If the umbrella company had to suffer the employers national insurance then they'd simply increase their agents fee to a higher level to compensate, so it makes no difference overall.
What it does mean though is that the contractor needs to build in this deduction when negotiating their daily rate.

Regarding tax deductible expenses, there needs to be a carefully worded contract in place for this but again it's common practice. If your friend doesn't feel comfortable with expenses being received tax-free then simply don't claim any.

Have you come across the awarding of holiday pay which is also subsequently deducted at the same rate too?

It all seems a little unusual but welcome to the world of contracting!

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Replying to Ruddles:
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By sparkler
08th Apr 2013 07:29

Agree with sheepy306

Umbrella companies are generally used by contractors who are either caught by IR35, or do not wish to suffer the administrative burden of operating a limited company.  Allowable expenses (employers' NI, travel, the umbrella company fee etc) are all deducted from the contractor's earnings before calculation of tax and employee's NI.  The various umbrella companies in the marketplace differ in terms of reputation, especially with regard to which expenses can be claimed and what evidence is needed - some appear to have wide-ranging dispensations in place which mean that everything under the sun can be claimed as an expense, without receipts!  

The contractor should still be better off working through the umbrella company than as a direct employee of the client, as long as they have negotiated a suitably high daily rate with the client.

For those contractors who are outside the IR35 legislation, then a more tax efficient way of receiving income will usually be to set up a limited company and take income as a mixture of salary and dividends. 

Thanks (1)
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By asillahi
09th Apr 2013 11:25

Not that complicated

As you say it looks like a genuine business so it probably is. I also think they have substitution covered as they can cover for each other. They also seem to have a fair bit of control over working practices and are probably clear from a mutuality of obligation point of view as well. Make sure that the work they do in each case is a specific project and that they can't be seen as being a part of the infrastructure of those companies. I can have a look at their contracts if you want (PCG Accredited) but if everything is as it seems you probably just need to keep an eye on the obvious but otherwise just treat them as any other limited company.

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Dave Chaplin
By Dave Chaplin
09th Apr 2013 14:36

Defer to employment law IR35 expert. Then take instruction.

Determining the status of IR35 is a legal issue, and requires expert knowledge of employment case law, in particular the IR35 case law. This is a contract lawyers job, not an accountants.

How to then do the accounts (inside for IR35, or outside etc) is a matter for the accountant, and not the legal expert - can you imagine!

Defer them to an expert for status evaluation, then take instruction from them as to how they want you to do their accounts.

They can start by using our free online IR35 status test.

Dave Chaplin, ContractorCalculator

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Replying to Red Leader:
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By asillahi
09th Apr 2013 15:06

Disagree with davechaplin

I don't think you need to refer to a lawyer. Anyone is only going to give their opinion anyway. Even judges see things differently and give differing judgements. If they are able to draw up their own contracts then get some help from IR35 experts to ensure that the correct clauses are used. Std contracts tend to be very non-committal either way but from their operation and mainly the fact that there are 2 of them I think it's one of the easier cases.

On the 3 principles of employment (personal service, control and MOO,) based on the brief info you have provided I see no issues, but do get the contracts worded correctly if possible.

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Chris M
By mr. mischief
09th Apr 2013 21:05

Both

All my clients get a contract status review by Qdos or PCG.  The reason is that HMRC accept this as evidence that reasonable steps were taken to at least have the contract drafted such that it is on the face of it outside IR35.

So we have the legal eagles covered.

Then - as above - it is a matter of building up specific information year by year, contract by contract.  In my view and experience of my "at risk" clients - admittedly only 10 to 15, over say a three year period most genuine contractors will have experienced some sort of event or treatment which was at odds with that experienced by the salary people on the team - mine are mostly project engineers. 

When you look at the cases, seemingly daft things like where folk are parking their cars have been mentioned.

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Dave Chaplin
By Dave Chaplin
10th Apr 2013 15:43

IR35 is daft, and encourages daft behaviour

IR35 encourages all sorts of daft behaviour by contractors, just to ensure the basics are covered. I talked about it in a recent blog - people substituting just for the sake of it (to prove they can) and others engineering "fixes" to work for free etc. One of our readers told us of a contract where he had a heated discussion with the client (a magic circle law firm) who wanted them to use their computer system to book holidays. The client finally accepted, after learning all about IR35, that (a) he didn't have to, and (b) he would tell them when he was not going to provide the services, rather than ask. All completely unnecessary really - but that's IR35 for you.

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