IR35 - IGNORANCE IS NO DEFENCE
When, in the 1999 budget, the Chancellor announced he was
introducing measures which would stop companies laying off
workers on a Friday and taking them back on the Monday on
a contract basis, so depriving the workers of their statutory
rights, sick pay, maternity pay etc, there could have been
few who would have disagreed with the sentiment.
Some months later this altruistic statement proved to be
somewhat less than transparent - it was in fact a new stealth
tax aimed at increasing revenue in the Treasury coffers.
The measure has become known as IR35, and, according to
the Paymaster General, Dawn Primarolo, could affect as many
as 90,000 small businesses in the UK, and other estimates
are higher.
Will it affect your business. Do you know what IR35 is.
Do you think it will only apply to IT and engineering ?
You could be in for a nasty shock.
IR35, in a nutshell, could apply to anyone who has at
least a 5% share in their limited company or partnership
and physically carries out their company contracts themselves
personally, to their clients.
This could be in IT, it could be engineering but it could
also include dental hygienists, milkmen, drivers, builders,
lecturers, training personnel, welders, electrical maintenance
fitters, in fact anyone who provides personal services to
their client through their own company.
You may contract direct with your customer or you may contract
through an agency, it will not matter. If the Inland Revenue
decide to investigate your status they will apply their
standard employment tests to each and every one of your
contracts to establish if you are really what they call
'self employed' or whether you are in fact a 'disguised
employee' of your client company.
And if they decide you are in fact a disguised employee,
they will demand that you pay Tax and NI on 95 % of your
total company income from the contract, after allowing you
to deduct only Professional Indemnity Insurance costs and
those limited expenses you could have claimed under Schedule
E had you really been an employee. The remaining 5% will
be allowed to cover all your business expenses including
insurances, accountancy fees, etc etc. You will no longer
be able to make capital investments in the way normal companies
do. Any money you choose to leave in your company will be
money on which you will have paid Income Tax and National
Insurance which cannot be reclaimed against capital investments
as you would Corporation Tax. You will not even be able
to make tax deductible company donations to charity. You
will no longer be able to retain profits for lean times
as under IR35 there can be no profits, 95% of income is
paid out as 'deemed salary'
If the IR decide you are a disguised employee you will
not of course still not be able to claim sickness benefit
etc from your disguised employer as IR35 specifically states
it does not alter your company status and is a personal
tax on the individual. You will still be employed by your
own company. The only difference is you will not be paying
the same tax and NI as an employee of your disguised employer.
What employee also pays employers NI on their earnings?
Dawn Primarolo has stated it will be relatively easy for
an individual to assess their status and if in doubt there
are facilities to submit your contract to IR35 status inspectors.
Anyone who has looked at the IR employment status manuals
will know they are far from simple and any decision by a
status inspector will be far from objective. Indeed there
is a specific instance of one contract receiving two assessments
from the IR, one passed and one failed. This evidence was
presented and accepted by the IR in court at the Judicial
Review.
To make matters worse no business has received any communication
from the IR to explain the new legislation. It has been
almost exclusively publicised on the IR web site. The result
is the IT contract companies who use the web all the time,
quickly became aware of the new laws and mounted a very
vocal opposition to it. The British Press perpetuated the
myth that only IT were affected, as , in the main, did M.P's,
but every day more people who work through personal services
companies find out they too could be caught.
If you supply your expertise to your clients are you sure
IR35 will not affect you? If you suspect it might or decide
it does not and the IR decide otherwise you could be in
for a hefty tax bill and penalties some years down the line
when the IR decides to call.
Detailed official information on IR35 can be found on the
IR website -
www.inlandrevenue.gov.uk/ir35/index.htm
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