VSJ – Feb 2001 – Work in Progress

Many self-employed IAP members have contacted us to express their concerns regarding the new legislation catchily entitled IR35 that may significantly affect their accounting and tax position. Here, Gordon Morrison, of Wheawill and Sudworth, the IAP’s Consulting Accountants, explains the current position and shares some of his experiences to date.

The purpose of this article is to update members on the way that the Inland Revenue is interpreting the IR35 legislation and to advise you as to the action you should be taking.

The original proposals, announced by Chancellor Gordon Brown in his February 1999 Budget, have caused major changes in the working arrangements of freelance contractors over the last eighteen months.

A recent survey has produced the startling statistics that 24% of IT contractors have left the UK to work abroad and an additional 18% have now taken permanent jobs. Our own statistics show that a very small percentage of contractors have taken the major step of working abroad and that perhaps 10-15% are moving to permanent positions. However IR35 is not the only reason for this. The pick-up in work that was anticipated once Y2K problems had been resolved has just not taken place, so contracts are pretty thin on the ground.

Let’s deal with some of the questions that we are asked most frequently:

How do I know if I will be caught by IR35? If your contract is effectively a provision of services through a Limited Company, then you can send a copy to the Inland Revenue for a ruling as to whether they consider it falls within the IR35 legislation.

How long will it take to receive this ruling? Our experience is that the Inland Revenue responds in six to eight weeks.  If you arrange your contract through an agency, you will always be asked for a copy of the contract that the agency has with the client. The Inland Revenue has made it clear that, if the contract terms are not identical they will regard you as being ‘caught’ by the legislation. Incidentally, all contracts were originally sent to a new office in St Austell, but, like so many things with IR35, this has changed and you can now submit contracts to your local tax office.

On what basis are my accounts prepared? The only expenses that may be deducted from income falling within IR35 are:

  • Your salary
  • Pension contributions
  • Professional indemnity insurance
  • Some travelling expenses
  • A further deduction of 5% (which includes ‘wife’s salary’).

Your expenses are not restricted in respect of income that does not fall within IR35. Accounts that contain a mixture of both types of income will obviously be complicated!

We have produced an IR35 calculator disk, which shows you how to operate your PAYE correctly. For a free copy, please telephone Barry or Evan on 020 7 730 8995. Alternatively, email barrym@wheawill.co.uk or evanj@wheawill.co.uk.

Can I improve my chances of escaping IR35 by drafting my contract differently? The answer is ‘Yes, you can!’ The Professional Contractors Group (PCG) have produced a contract that the Inland Revenue has approved under certain circumstances. However, the problem is that there is no point in having a contract that technically circumvents IR35 if the performance of the contract does not. This is the key point. We have found that most agencies have not been able to persuade most of their clients to agree to what would amount to quite important contractual changes, particularly in respect of ‘substitution’ clauses. There are well-established principles that define self-employment but, unfortunately, these have all been developed through case law rather than by statute. Case law can – and does – change.

Why don’t I forget all about IR35 and carry on regardless? The answer is quite simple. The Inland Revenue will catch up with you. If you have ignored the legislation you will be in serious difficulties. We have heard all kinds of stupid stories, such as that there is only a 2% chance of the Inland Revenue identifying a given contractor. This is rubbish. The Inland Revenue is writing to the 3000 agencies that are the principal providers of contractors for details of payments made to contractors. Local tax offices will also pick out contractors as they deal with their accounts.

Are there still unresolved issues? You can bet there are! The current problem is that it may prove essential to prepare account up to 5 April 2000 and annually to 5 April thereafter. This is because, technically, you may be taxed twice on some income otherwise. Ridiculous, we know, but there’s quite a debate raging on this at the moment!

If I need help, what can I do? We have found that many contractors know more about IR35 than their accountants. If there are any problems that you would like to talk through, please speak to Gordon or Barry on 020 7 730 8995 or email Gordon at gordonm@wheawill.co.uk.

Interesting project or development? Let us know at eo@iap.org.uk!

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