Q. I have read recently in the press that the Tories have promised to review the IR35 legislation if they are elected in May. Being directly affected by this legislation could you please tell me what the outcome of the review may be and how soon it will take place? In case the Tories are unsuccessful at the polls in May what actions could I take to strengthen my position against an investigation from H M revenue & customs?
Ben Chaplin, Managing Director of Peninsula TaxWise responds:
A. In a letter to the Professional Contractors Group (PCG), Mark Prisk Conservative shadow business minister wrote, “A Conservative government would undertake a fundamental review of small business taxation matters, including IR35.”
Seeing the potential opportunity for votes from this business sector Mark Prisk told the PCG, “We recognise and value the contribution of freelancers and we are well aware of the way in which the current government has treated them. We want to deal with this problem comprehensively, in a way which provides us all with a lasting solution, not a short term fix.” The Conservative business spokesman added that the IR35 review would be a priority for a new Office of Tax Simplification. Beyond that no details have been offered as to what they would hope the review would achieve.
Although the Conservaties pledge to review the current legislation was favourably received no timetable for such a review was given and considering the countrys current economic problems one can not see this issue being the top of a new administrations list of priorities.
The IR35 legislation would therefore appear to be set to be a countinuing problem for freelancers within the short to medium term at least.
The current Intermediaries legislation was introduced on 6th April 2000 and still continues today. It was first proposed by the Chancellor in the 1999 Budget and details were given in the Budget press release numbered IR35. Following extensive consultation, revised proposals were announced in a new press release dated 23 September 1999. However, the legislation is now commonly referred to as ‘IR35’.
The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies (PSC’s) or partnerships, in circumstances where an individual worker would otherwise -
• For tax purposes, be regarded as an employee of the client; and
• For NICs purposes, be regarded as employed in employed earner’s employment by the client.
Does IR35 affect all Personal Services Companies?
Yes, in the sense that all PSC’s need to consider IR35 and take action to protect themselves from it. However, not all PSC’s are caught by IR35.
Determing whether or not you are caught by IR35(or being ‘inside IR35’) depends on a number of factors. It is not entirely objective whether a contractor is caught and depends on the terms and conditions in the contract, together with the clients working arrangements. Being inside or outside IR35 is not a black and white issue.
How can PSC’s determine if they are caught?
The law for tax and social security legislation does not define employment and self-employment. Over the years Courts have considered the issue and their guidance on this issue is known as IR35 Case Law.
To determine your clients IR35 status it is best to seek expert IR35 advice and have the contract and working arrangements reviewed.
What happens if you are are caught?
If you are “caught by IR35”, then all fees are considered “deemed salary” through your PSC and Tax and NIC will need to be deducted similar to an employee.
At TaxWise we offer a full IR35 review service and for those businesses who have our tax enquiry insurance we are also able to offer Tax Compensation Cover (TCC). TaxWise are able to provide:
A Full Contract review – a full written appraisal giving details of how to improve your position at the cost of £85 plus VAT for an e-mail copy or £100 plus VAT for a hard copy.
A Short Contract Review – which indicates if the contract is a fail or pass and gives details of the negative issues at the cost of £25 plus VAT.
Contract template – An IR35 friendly contract plus associated documents at the cost of £100 plus VAT.
TCC35 Insurance - For an £200 (including IPT) TCC 35 gives an upgrade to our Fee Protection cover. This additional insurance will cover any additional Income Tax, NIC, Interest and Penalties which arise, should HMRC successfully challenge your clients IR35 position. To apply for TCC35 you will need to complete our TCC Application Form.
For further details and any queries please contact TaxWise at email@example.com on 01455 852570.