Dave Chaplin is founder and CEO of ContractorCalculator and author of The Contractors Handbook and Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients.
Started in 1999, ContractorCalculator.co.uk is the leading independent website for the UK contracting industry – most of whom are highly skilled knowledge workers.
Dave has lived and breathed contracting since he first took the plunge and became ‘one of the chosen’ in 1997. He spent seven years working as an IT contractor in the City of London on critical, cutting-edge IT infrastructure and development projects for global players like HSBC, Merrill Lynch, Cable and Wireless, and many others.
The car issue sounds like it might be the least of the contractors worries re IR35. It doesn't really figure in the three main tests of employment (personal service, control, mutuality of obligation), and is more in the part and parcel zone.
My crystal ball says that a possible area of concern might be that the client has provided a car and is then directing them WHERE to work, indicating a heavy level of control. But, this is just one factor in the whole picture of course.
"Long term contractor" sends alarm bells too. Are they on a project? Do they have deliverables? Or are they a tail-end charlie having turned up with a set of skills and are then told what to work on, perhaps with minimum hours per week.
They could start by getting a free IR35 Review on IR35Testing.co.uk [excuse the plug] then go from there. We don't ask about use of cars and so on - for a reason - there are much bigger concerns. Also, it's never come up in the case law specifically.
CEO, ContractorCalculator / IR35Testing
I am obviously referring to those paying higher rate tax payers.
BTL mortgage relief stunts growth
A friend of mine has a few BTL's unencumbered, and was going to leverage them up with mortgages to fund an extension on his house for £300K. But he isn't going to bother now after he learnt about the new rules. So there's £300K that isn't going into builders pockets this year. One expects some deleveraging to happen quite soon in the BTL market. And where are all these first time buyers with 25% deposits to buy them? There's not enough of them. When the tide goes out we are going to find a few people swimming naked in the BTL market.
The new dividend tax punishes SME owners
It's a stretch to think that Osbourne wouldn't have known that his new dividend tax regime would result in significant tax rises for small business owners. For some small husband/wife businesses sharing a £45K dividend they pay an extra £2K tax per year. Those sharing a £60K div get hit with an extra £3300.
How on earth can the Tories call themselves the party of small business?
They also announced £6bn of support for SME's the other day, yep, you've got it, using the money they took from them in the first place. If I steal £50 from your pocket and then give it back to you and claim I'm helping you out, you might take a different view.
We've been trying to get this message out for about about small businesses for about a week now, but sadly the mainstream press aren't interested.
Here's the story if anyone cares to try.
Take dividends now
If the limited company has no value, commonly called a PSC, then chances are the director/employee will be on a low circa £8K salary and taking the rest in dividends. As our dividend impact calculator shows there is som ebizarre behaviour for those who are currently towards the end of the basic rate band. They end up getting rather stuffed, more so than anyone who is just into the HRT band. So, how to get around it? If you can somehow survive on other income for a few years then run the cash up, disolve via MVL and pay 10%. Take a break and then start again with a new company. If your company is a business and has value, there's not really much you can do, unless you plan to sell it in a few years and can survive on savings in the meantime, also making use of 10% ER rates. What is true, when you crunch the numbers, is that if you have a large cash surplus and were planning on taking it out at some point for a reason (house project etc) then it is better to do it before the new tax year starts. The savings are considerable, especially if you are splitting dividends - because you get hit twice.
Just seek instruction
Accountants don't need to spend time learning the complex employment status case law that has been formed over decades of court cases. Even judges find it hard to assess and rule on status. In the same way that employment status lawyers don't learn double entry book-keeping and become accredited accountants, accountants down need to step into the employment status zone and become lawyers.
Simply point your client to IR35, ask them to self-assess, perhaps pointing them to an IR35 expert, and then take instruction on how to deal with their accounts. If they are then investigated at a later date, point them to tax experts who can help defend their employment status decision.
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.
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
There's no history of challenges based on parts of a contract
There's no legal precedent or historic HMRC challenge where HMRC have tried to split the areas of work for a contract and say part of it is inside IR35 and part of it is outside IR35. The only case that has been split is one where the contractor had a series of contracts and HMRC argued that at some point he became a disguised employee.
Making two sets of contracts and services doesn't seem to be the way forward here. HMRC will have a simple argument to bundle them both under one contract of personal service.
For IR35 cases the whole picture is analysed and a conclusion drawn. So you can have some negative factors and positive factors, provided the positive factors outweigh the negative ones. For example, you might be controlled in a minor way (perhaps "supervised" - a can of worms that phrase!) but have provided a substitute to do some of the work. Substitution would trump the minor control issue.
As always, seek some professional advice and plan to behave in a manner (working conditions) that ticks most of the positive factor boxes whilst leaving the negative ones blank. Actively try and compile the evidence required that will easily bat away an inspector.
IR35 caught contractors do not make profits
It is surprising to see an inside IR35 caught contractor on £20K per year even bothering to use a limited company. An umbrella would be a better move.
IR35 caught contractors using a limited company typically take their entire gross profits out as salary, with all the NI and PAYE implications, reducing the profits to zero, and hence no corporation tax issues to worry about, and no IR35 deemed payments to get involved with. It's the simplest/cleanest way to manage things if inside IR35.