As his accountants saw it, he worked from his client's premises; didn't have a right of substitution; and used his client's equipment. They felt he was a 'disguised employee' and inside IR35.

Uncertainty
This situation serves to illustrate the level of uncertainty which, even after four years, still surrounds IR35.

From frequent contact with freelancers via Shout99, there are few freelancers who cannot make a case to be outside IR35. The hurdles which one has to cross to be outside were so blurred that that uncertainty can be used to the freelancer's advantage and more and more cases are being settled in the freelancer's favour.

IR35 is a badly drafted piece of legislation. What most businesses - small or large - what from the Government is certainty and clarity. Yet the rules on which IR35 are based are neither, as evidenced when an accountant and their client still can't agree on his status. It is hard to imagine that multi-nationals would have tolerated such a piece of tax legislation which affected them in this way.

On the plus side, the 'right of substitution' and 'lack of mutuality of obligation' are two key factors in proving you are outside IR35. However, the exclusion of either or both in a contract does not necessarily mean a contractor is inside IR35.

There has not been a clear definition of this mythical creature which the Government has categorised as a 'disguised employee'. Neither has the Government explained what it means when it frequently refers to wanting to target its assistance at 'genuine or real small businesses'.

Voluntary tax
Several years ago, the then Chairman of the PCG, predicted that IR35 would become a 'voluntary tax' within a couple of years. There is a case to be made that it is: with certain caveats.

First, the freelancer has to be prepared to act and think like a business. He or she should not be integrated into their client's culture more than is necessary. The rewards they receive are for the risks they run. How is the business marketed? What 'employee rights' to they forgo? What risks to they take? How do they document and demonstrate they are 'in business on their own account'? What is the reality of the working arrangement?

Secondly, it can be argued that the tax system should be clear and simple enough that any business can conduct its affairs without the need for professional representation in their dealings with the Revenue. The reality of the situation is that the cost in terms of time, money and stress of 'going it alone' in a Revenue dispute have already taken a toll on a number of businesses. Now it is increasingly the case that freelancers are taking out a variety of insurance policies to ensure that they can hand over any dispute to a team of professionals.

Insurance
An insurance policy used to be associated with misfortune or accident, to provide protection against the unpredictable such as accidents, theft or something that was left to chance. It is ironic that insurance is now taken out by small businesses to protect themselves against the actions of their own Government.

IR35 is still far from clear; Section660, the so-called married couple's business tax, has left thousands of small, family-owned businesses uncertain of their current and past tax liabilities; the recent dividend tax, IR591, was needed to 'close a loophole' which only 18 months earlier had been 'an incentive'; and now the entire small business community is watching what the Chancellor has planned in his review of owner-managed businesses, where speculation fills the void created by the lack of direct information creating yet more uncertainty about the future.

More information...
If you are considering protecting yourself against Inland Revenue disputes relating to IR35, Section 660 or other tax and VAT issues, Shout99 works with Qdos Consulting to provide a range of insurances and protection for freelancers. Qdos Consulting is one of the country's leading specialist firms in freelancer disputes with the Revenue, having taken over 600 IR35 disputes and successfully concluded over 350 without going to the Special Commissioner. Only one has been conceded. The remainder has resulted in a tax saving of over £11,000,000.

Shout99 and Qdos offer Freelancers Outside IR35 which includes a manual to show how to document and demonstrate that you are a 'genuine business' and operate outside IR35. It also provides representation by Qdos in the event of a review dispute. It costs £104.50 for a year's cover. For more information, click on Freelancers Outside IR35.

Qdos also offers a range of other insurances for freelancers, incuding TLC 35, an insurance which also covers tax liability under IR35, available from £325 per year. For more information, see the range of products and services in Shout99's Freelancers' Shop

There is a comparison table of some of the insurances available in pdf form for download here: Comparison table

Also, if you think you have paid IR35 tax in previous years and now believe you have a case to reclaim it, click on Out of the Box - IR35 tax back to see how you can receive a free review of your situation.

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Susie Hughes © Shout99.com 2004