#IR35 Update- This is an area which continues to plague legitimate companies and partnerships. The exposure is high if you get it wrong; get it right and there are substantial tax savings. The key issues are a proper contract and proper appraisal of the status of the proprietor. HMRC enquiries continue to proliferate and Non Executive Board members are felt to be particularly at risk.
Introduction – Why it Exists
The aim of the IR35 legislation is to stop people who but for the use of an intermediary, are really employees. This brings in all the consequences for primary and secondary Class 1 NICs. The intermediary could be either a personal service company or a partnership.
IR35 achieves this by forcing the company to operate PAYE in respect of an amount of ‘notional’ remuneration, being basically the difference between the company’s profit on work caught by the IR35 rules and the remuneration drawn by the owner-director in respect of that work.
This can actually end up costing the hapless entrepreneur far more than had he simply been hired.
However given properly drawn up contracts and an awareness of the tax issues to get right there are very substantial savings to be had, particularly with the onset of the 50% tax rate.
IR 35 Where we are
The webinar referred to ‘countless’ HMRC enquiries being registered around IR 35 issues. These are dual enquiries, one on the director and one on the company so time costs can escalate quickly.
HMRC have had mixed success in the Courts. The common thread is that HMRC will take a two pronged attack:
• Looking in detail at the written contract
• Looking precisely at what actually happens in the business and if the contract reflects the day to day business operation.
In order to get to this position there needs to be a strong case in the first place that there is an ‘Employee’
Are you an employee
The status factors (holiday pay, substitution, financial risk, multiple clients etc) are common knowledge, the current HMRC approach is set out in their toolkit and at ESM 0108
It is possible to ask for an opinion in writing from HMRC to confirm that a client is not to be regarded as an employee. They will also give muted advice on a contract for services (self employed contract), but not on all cases.
The legislation was introduced in September 1999, it has achieved a recovery of around 1% of the yield targeted by HMRC, there are no published figures of recovery from the MSC initiative.
The following ‘hallmark’ cases lost by HMRC have identified several themes that are key to strategy and to ‘IR 35 proof’ clients. These are set out in the tips below
Hall v Lorimer
Novasoft v HMRC
Dragonfly Consulting v HMRC
MBF Design Services v HMRC
Tips to avoid IR 35
From the above cases, the following may be helpful:
• Ensure the written contract reflects the day to day realities:
HMRC often seek invasive ‘witness statements’ during an enquiry.
• Use a right of cancellation:
A lack of mutual obligation and lack of control by the end client have proved in many of these cases to be vital pointers
• Frequency of payment
Irregular lump sums are preferable to salary type payments
• Don’t overlook Holiday arrangements
Vital contractor provides own equipment, meets cost of training and regulatory certificates etc if required
• Review contracts regularly
Not necessarily annually, perhaps depending on client’s lead factors and again express the right to cancel the contract without compensation
• Re-write your contract
If you feel it is vulnerable
• Change the business structure, some scenario’s are not caught by IR35:
If you operate your business through a personal service company, IR35 will only apply to you if:
• More than 5% of the ordinary share capital of the company is owned by you or your family, or
• You or your family are entitled to…