Contractor Corner - Inside of IR35 at even greater expense
Welcome to Contractor Corner, the series written specifically for accountants with clients who are contractors
This blog is taken from the ICPA website. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.
First Tax Tribunal for six years
The last IR35 Tribunal was six years ago in 2011, but the scarcity of tax tribunals over the years ended on 4 October 2017 when Qdos defended a client at a Tax Tribunal, and according to the latest IR35 Forum (held on 17 July) there could be more to come.
The case, in our opinion, was strong, but we felt that the outcome would depend very much on the actual working arrangements and particularly, evidence provided by the end client. In this case the witness statements provided by the end client (who are a public sector body) was very encouraging.
Although the working practices tend to be more important than the contractual terms in an IR35 enquiry, as they reflect the reality of the situation, the contractual terms were often referred to throughout the hearing. The upper level contract was particularly prevalent, mainly because there were clauses within the terms which didn’t support the contractor, rather the opposite. The contractor was none the wiser because they had no sight of the upper level contract terms.
HMRC did not defend the case themselves, but instead appointed legal counsel to do so for them. In Qdos’ opinion, this resulted in a more daunting experience due to the questioning method adopted by legal counsel, which was to ask leading or very broad questions. The questions posed sometimes seemed more like statements, which unless they were refuted could be assumed as the contractor’s agreement. HMRC did attend the meeting and whilst legal counsel put forward the arguments, HMRC made sure that all the points they wished to make were addressed by constantly passing along notes to the lawyers.
The outcome of the case cannot be revealed at this stage as it is still pending a decision. However, the Judge presiding over the case demonstrated a degree of sympathy in asking the contractor to clarify certain points, where it was felt that the contractor hadn’t made themselves very clear or where the Judge wanted to ensure they had a clear understanding over certain points.
Contractors who fancy their chances defending themselves at such a hearing could be in for a rude awakening, and our advice is that any contractors who find themselves subject to an IR35 enquiry should seek advice from an expert straight away, particularly given HMRC’s apparent eagerness to litigate more IR35 cases.
Inside of IR35 at even greater expense?
The threat of being caught by IR35 has reached an all-time high, particularly in view of the fact that the end client is required to determine IR35 status for those working within the public sector, and all contractors could find themselves in the same boat if IR35 reform is introduced within the private sector. All the signs are that this will happen sooner rather than later.
The IR35 legislation has been around since the year 2000, and many contractors are fully aware of the consequences of IR35. Contractors deemed to fall inside of IR35 will have to pay tax and National Insurance contributions on their income, as an employee would.
Contractors falling inside of IR35 will no longer be able to pay themselves in the most tax efficient manner via a combination of low salary and high dividends - one of the main reasons for setting up a limited company, but the benefits and security employment brings are not provided instead, despite being deemed an employee.
The 5% ‘expense allowance’ can be taken advantage of, allowing those working in the private sector to claw back 5% of income generated via their contract when inside IR35 to meet the cost of running a company. However, the 5% expense allowance has been scrapped for contractors working in the public sector, and may shortly apply for private sector clients too if recent publicity is anything to go by.
Contractors should also note that whether in the public or private sector, travel and subsistence expenses on ordinary commuting cannot be claimed where the status is deemed to fall inside of IR35. Any travel and subsistence expenses claimed for the contract falling inside of IR35, will form part of the tax liability when HMRC calculate the tax due in an enquiry. This does not affect the 24-month rule, which should still be taken into account and considered separately. Those who operate outside of IR35 can continue to claim such expenses.
All is not lost completely, however, as tax relief on pension contributions made into the company for the worker can still be made use of by contractors operating inside of IR35, whether they work in the public or private sector. Contributions will be tax free as long as they do not exceed the annual allowance, which is currently capped at £40,000, plus any unused allowance carried forward from the previous three years (subject to the individual being a member of a registered pension scheme in the tax year in which unused allowance arises).
• Thanks to Qdos Contractor for these articles