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