IR35 is the "intermediaries legislation" which was announced in
the 1999 budget and came into force in April 2000. IR35 was introduced because
the Government believed that some people were providing their services through
limited companies or partnerships as a means of avoiding tax. IR35 allows
the Inland Revenue to treat fees paid to a company or a partnership as an
individual's personal salary.
How does IR35 work?
IR35 applies to individuals ("workers") who provide services
through:
- a limited company in which they own more than 5% of the shares, or
- a partnership in which they take more than 60% of the fees
(the "intermediary"), to another business or individual ("client").
The legislation allows the Revenue to disregard the intermediary and
determine whether, if there had been a direct contract between the worker
and the client, it would have been a contract of employment, in effect
applying the case-law distinction between employment and self-employment
to the relationship.
If the relationship is found to be one of "disguised employment",
the fees paid by the client to the intermediary are deemed to have been
paid to the worker by the intermediary, and are subject to PAYE and NICs.
A fixed allowance of just 5% may be deducted from the fees to cover business
expenses, irrespective of actual expenses incurred in running the business
or how much is paid to the worker as salary or in any other form.
IR35 applies only where the consultant is a significant shareholder or
partner, which in practice means small companies and partnerships. Large
service companies are unaffected.
IR35 does not create an actual employment relationship between the worker
and the client. The worker gets no employment rights with respect to the
client. The intermediary company remains liable for all PAYE and NICs,
including employers NICs, on the fees received, and for the holiday pay,
sick pay, maternity pay and so forth for the worker.
Isn't this about fairness?
No, it most certainly is not! The Government has repeatedly stated that
freelancers pay proportionately less tax and NI than nurses and that this
is to redress the balance. However, it conveniently ignores the fact that
freelancers are not employees of their clients and do not get any of the
benefits normally associated with employment. Freelancers have to fund
their own sick pay, holiday pay, company pension, training, and have a
reduced ability to claim unemployment benefit.
What is PCG doing about IR35?
PCG has always supported the aim of preventing abuse of the tax system,
but warned from the beginning that IR35 was a blunt instrument that would
put genuine small businesses at risk. As feared at the outset, IR35 has
created uncertainty and made it very difficult for small businesses and
their advisers to know where the boundaries lie. The PCG remains opposed
to IR35 in principle. It believes that professional freelance contractors
are genuinely in business and therefore not, on a correct interpretation
of the law, subject to IR35.
PCG is helping its members to show that they are not subject to IR35,
by:
- Advising freelance contractors, agents and clients how to draft contracts
correctly
- Providing members with Professional Expenses Insurance and access
to discounted professional advice and insurance products
- Supporting selected appeals against IR35 status determinations, such
as Roger Tilbury's case
- Seeking test cases to resolve outstanding issues of law
- Meeting regularly with the Inland Revenue to discuss implementation
issues
Following consultations with PCG, the Inland Revenue issued a new release
of its IR35 guidelines in May 2002, which represented a significant advance.
Changes included the following:
- Contract length is no longer considered significant in deciding whether
an engagement is subject to IR35.
- Use of equipment provided by the client is no longer necessarily considered
to be a pointer to "disguised employment."
- Several consecutive contracts with one client are not necessarily
considered to point to "disguised employment."
- Greater recognition is now given to factors indicating "being
in business on your own account."
- There is no longer a standard "fail" letter, but an individual
assessment of factors.
PCG advice to freelance contractors
- Draft your contracts correctly, using the PCG standard contract templates
available to members, or by using the services of qualified professionals
who understand IR35 and employment law, such as PCG Affiliate Lawspeed.
- Keep your business records and internal paperwork well organised -
not only for IR35 purposes. Trying to backfill absent records during
an investigation - and in a rush - is not only bad practice and likely
to result in errors, but also in some cases illegal.
- In the event of any tax investigation, including a seemingly innocent
PAYE review, seek professional advice immediately.
- Consider taking out PCG's Route35 cover to complement the Tax Investigation
Insurance included within your membership package. It guarantees expert
advice and support throughout the whole process of an IR35 investigation
and uniquely includes professional support throughout a PAYE compliance
enquiry.
- Do not, under any circumstances, submit your contracts to the Inland
Revenue. Not only is this likely to result in an investigation if you
disagree with the verdict, but it will also mean being declined cover
under your Tax Investigation Insurance policy.
Read PCG's Guide to IR35, available on the web site.
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