Experience to date, nearly three years after the introduction of IR35, shows that IR35 is in many ways a voluntary tax. Freelancers who are determined not to be caught by IR35, who have a reasonably sound contract, and who conduct themselves as a business rather than a temporary employee can generally convince the Inland Revenue that they are outside IR35. The experience of specialist advisers to the freelancer market, is that virtually no disputed status cases have yet been lost.
Shout99, which has been working on IR35 issues for almost four years now, recently launched the new Freelancers Outside IR35 system (FO35) This provides freelancers with guidance on IR35 matters, a logical system for documenting and evidencing their business operations and tax and VAT investigation insurance. This insurance also covers any penalties if the freelancer’s tax status is successfully challenged by the Revenue and is evidence of the confidence that the insurers and their advisers Qdos have that the vast majority of freelancers can demonstrate that they had reasonable grounds for claiming to be outside IR35.
As more and more freelancers win their arguments with the Revenue on IR35 others who were advised to pay the additional taxes and NIC will increasingly wonder if they have been properly advised. Shout99 can help accountants help their clients to be outside IR35. It is therefore launching a new web based special interest group for accountants dealing with IR35.
Is your client base under threat?
Since IR35 came into effect in April 2000 there has been a significant decline in the number of freelance contractors who are working through their own service company. Some of the leading firms of accountants who specialise in this market have seen client numbers fall by 30%.
This is largely due to the effects of IR35 but has been reinforced by the decline in demand for contractors – especially in IT – occasioned by the economic downturn and the growth in the use of overseas workers brought in under the fast track visa system.
Many contractors, who might be affected by IR35, have also turned away from personal companies. Instead they have gone permanent or are choosing to work through umbrella companies and composite companies. These companies are frequently set up managed by specialist firms of accountants – frequently unqualified and unregulated by any professional body. Many have used promises of arrangements that are claimed to take the contractor outside IR35 or promises of techniques – such as employee benefit trusts – that would enable the contractor to maintain their post tax income at pre IR35 levels.
Finally faced by the uncertainties of IR35 many professional accountants have taken a cautious approach to their client’s IR35 status leading to many deciding to proceed on the basis of being caught by IR35. This further reduces the client base as the contractors find themselves gaining insufficient benefit from having their own company to justify the costs and the administrative hassles involved.
However, there is good news for contractors and their accountants. Contractors armed with the right advice and with supportive accountants and tax experts to fight their case are beating the Revenue time and time again over IR35 status issues. Qdos, the service provider for the Freelancers Outside IR35 package claim to have only lost one IR35 status case out of 100 they have settled to date. Specialist contracting accountants like SJD and JSA claim similar success rates.
Achieving these success rates is not rocket science. They do not reflect the use of cast iron “outside IR35” contracts. They are based on typical contracts that generally contain the usual suspects – payment by the hour based on timesheets, working on site, using the client’s equipment, limited rights of substitution at best, contract periods that run to months or years rather than weeks, often working for one client at a time etc.
However, these successes are frequently characterised by a few common features:
- A contractor who is adamant he or she is not a disguised employee of their client
- A contract that is, at worst, borderline
- Evidence that they have at least some of the key attributes of a business – office facilities (usually at home) which they use for some client work and general business administration; equipment that they use for some client work; the usual business insurances; evidence of marketing activities etc
With the approach of the next tax year-end accountants and their freelancer clients will be considering whether they need to prepare a deemed salary calculation under IR35 and how to complete the form P35. Any tax and NIC due on a deemed salary has to be paid by 19 April and the P35 filed by 19 May.
This is not a decision that is lightly made. The financial consequences of being inside or outside IR35 are considerable. With potential tax savings of £10K plus freelancers are looking to accountants to help them ensure that their status is properly determined. Failure to advise them objectively will have major consequences for the freelancer and could rebound upon the accountant. There is more discussion of the issue of completing the P35 in the attachments below.
How Shout99 can help
Shout99 can help accountants to defend their client’s tax status aggressively and with more confidence. Because of the uncertainty inherent in many tax status situations far too many contractors have given in to the Revenue’s implied threats and decided that they had to pay the additional tax and NIC due under IR35. As more contractors successfully fight IR35 others will wonder if they have been properly advised on their status and whether they should have paid up so willingly.
Shout99 provides accountants with a dedicated area on the website where they can compare IR35 notes with each other – comparing, for example, Revenue responses on common issues. This area is moderated by Shout99’s own IR35 expert, Kevin Miller, who will also contribute to the discussions. To join; simply email your Shout99 username to firstname.lastname@example.org
Shout99 also provides the Freelancers Outside IR35 system ("FO35"), which enables freelancers to record and document their business activities in an effective way that will help them or their accountants deal with an employer’s compliance visit.
To help accountants we are attaching as a word document the following summaries:
- The key IR35 status issues
- A discussion of penalties under IR35 and completing the P35
- Comparisons of the typical post tax income for a contractor working via their own company outside IR35 and working under IR35. This also illustrates the costs of using a typical umbrella arrangement. This graphically illustrates how much you can save your clients if you can work with them to keep them outside IR35.
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Kevin Miller, FCA, © Shout99.com 2003