• 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.