In previous years, HMRC advised that they would not target companies by saying "Yes" to question 6 on the P35.
Kate Cottrell of Bauer & Cottrell states that "This is no longer the case. If the box on the P35 is ticked to say that IR35 does not apply and it later transpires that it actually did then this is considered to be negligence and penalties apply. Worst still if wilful action is taken when ticking the boxes, penalties start at 100% of the tax lost".
How to determine a "Yes" or "No" answer
Where Contractors and Freelancers have turnover of 50% or more earned by providing their services, then the answer needs to be "Yes" to the service company part of the question.
On the second part of the question, if any engagements have been inside IR35 and a deemed payment calculated; regardless of whether other engagements outside IR35 have been undertaken, then the answer is "Yes". Only where all engagements are outside IR35 should the question be answered "No".
If you are in any doubt whatsoever, it is advisable to have a professional contract review, without one you could be leaving yourself wide open to the HMRC penalty regime.
Dave Chaplin from Contractor Calculator wrote an interesting article on IR35 for contractors coming from overseas.
Dave said "Contractors, understandably, do not like IR35. It came into effect in 1999 and is generally recognised by the contracting sector and its industry body, the Professional Contractors Group, as unfair."
It seemed a little strange in some ways as it may give some people the impression that IR35 does not apply if you come from overseas and work in the UK through a Limited company as a contractor, but of course it does.
The article is yet another good primer for anyone wanting to know about IR35 and clearly explains about the three tests for employment:-
- Personal Service
- Control
- Mutuality Of Obligation
We have some useful videos on our IR35 Knowledgebase articles which you will find here.
Recentlythere have been several articles on Freelancer sites asking questionswith regards to the IR35 status of their contract.
Incredulously,I stumbled across a comment whereby one person whose contract did fallwithin IR35 rules was advised by a certain agency that “it is still OKto work outside IR35 as long as you keep your head down” and theystated that “this is what a lot of contractors are doing”.
Most of us know HMRC’s stance on tax evasion. The introduction of IR35 failed to close the net for them so further legislation was written, namely the MSC rules. These guys are not going to back down.
Sincethe confusion with the MSC regulations and introduction this January ofthe “Debt Transfer Provision”; many providers to the contractingindustry such as agencies, accountants and advisors have had to makeamendments to the way in which they work with you, the Freelancer.
Wherein past years some of the more unscrupulous providers were more thanhappy to provide services such as ‘ready made outside IR35 contracts’, andnegotiate on your behalf for IR35 friendly contracts that did notreflect the true situation, current operations paint a very differentpicture.
The situation of the tax man knocking on the door is now two-fold.
Previously it was you that would take the hit. Now with the new rules they can seek to ‘hit on’ the providers too.
So what does all of this mean?
In a nutshell:
Ifyou are genuinely “in business on your own account” and are notdisguised as self-employed, it’s your responsibility to have controlover your business and make all decisions accordingly.
Thinkvery carefully about using a "complete service" for a fixed monthly feefrom your business advisor, it's your business to "manage", not theirs.
This is not to say that you cannot seek professional advice, HMRC do not expect you to be an expert in all fields. Justensure that you seek advice that is specific to you personally, ensurethat your chosen advisor is reputable, is aware of the full facts andthat you are honest with them.
Dave Chaplin at Contractor Calculator features an article on the HMRC new powers of investigation under Section 36.
Based on an interview with Matt Boddington at Accountax,the article points out that under these powers HMRC can obtain evidencefrom a Contractor's end client and does not have to advise thecontractor of what the end client has said, unless the case goes beforea Tribunal.
Dave concludes that these powers put HMRC in a very strong positionand that it is wise for contractors to protect themselves withinsurance policies to protect against HMRC action.
We would certainly agree with all the commenst made by both DaveChaplin and Matt Boddington, and think that it is important to add acouple of extra points.
Firstly - There is a bit of an "alarmist" theme in the article,after all thats what news is about ! We agree entirely that contractorsneed to know about them, but any professional Contractor or Freelancerwho has either confidently assessed their own IR35 position ( by propermethods though, not just a vague hope !) or had their contractsassessed by a professional, does not need to worry any more aboutSection 36, as long as the contractor has obtained the necessarydocumentation and kept all the evidence that supports their IR35status, at the end of the day Section 36 just means you need to beprepared. These powers do not change your actual working arrangementsor the contractual terms on which you have been engaged.
Secondly - In the case of a Tribunal all evidence from both sides isseen by both sides, so nothing is hidden. If Contractors either usetheir membership of the PCG or use an accountant that provides TaxInvestigation Service through an Insurance Policy ( Plug: We Do !) thenthey need have no extra fear of having to go to a Tribunal. Defendingyour IR35 status is about preparation long before an investigation everis considered by HMRC, as long as you have a defensible position.
Having said that we have reproduced this paragraph from MattBoddington word for word, we believe that all professional Contractorsand Freelancers should read his words carefully:-
“A successful IR35 defence is not about winning; it’sabout avoiding a case in the first place,” explains Boddington. “HMRChave given themselves a whole new array of powers and penalties, whichthey are itching to try out on taxpayers they have targeted for maximum‘yield’ and it is no secret that HMRC are hostile to the contractingsector.”
From this we would conclude
- IR35 investigations are, as many have pointed out, going to be on the increase
- Be prepared, confidently know your IR35 status
- HMRC already has the information to target high yielding cases ( From P35 and the Self Assessment Tax Return)
- Your defence of your IR35 status is down to you collecting all the required information whilst on your contract
- Your maintenance of your IR35 position will also be dependent onyour behavious/actions whilst on contract, and the evidence kept ofthose actions.
- Make sure your advisers are very up to date with IR35
- Protect yourself using appropriate insurances
- Take advice, be correctly informed, be objective, be prepared
For further information you may want to read or guidance on IR35 and also look at our series of IR35 videos , in particular the final video IR35- How To Manage Your Proof and evidence.
If you are a Professional Contractor or Freelancer looking for
Agencies that are focussed on providing opportunities to work on
Outside IR35 engagements then one starting place could be those
Agencies taking part in the PCG's Approved Contract Scheme.
The PCG say
The aim is to facilitate the availability of standard,
commercially sound, business-to-business contracts suitable for
freelance businesses operating outside IR35.
There are 10 Innovative Agencies listed on the PCG website and
professional Contractors and Freelancers looking for opportunities
outside IR35 may be advised to make contact with these recruiters who
all use a model contract approved by the PCG.
Having an approved contract is a good start to being outside IR35, but it is not the whole story. See our full guidance on IR35 here or take a look at our set of 7 videos on IR35 that can be seen at www.bfca.tv .
We actively encourage Professional Contractors and Freelancers to join the PCG . The website lists all the benefits of joining and if you use this link to join the PCG as a member you will receive 15% discount.
We launched our video series today on understanding IR35 at www.bfca.tv .
In the series of videos a Contractor's Accountant works through IR35 in 7 steps covering:-
- IR35 The Basics
- What and how to test for IR35
- Personal Service
- Control
- Mutuality Of Obligation
- Other Factors to Consider
- Managing Proof and Evidence
The series of videos, on average just over 4 minutes long each, takethe viewer through the essential knowledge that every ProfessionalContractor and Freelancer needs to be aware of as a Director of aLimited Company that is affected by the IR35 legislation.
The Tilson Employment Tribunal case has had plenty of coverage onwebsites dedicated to Professional Contractors and Freelancers,including ours.
Our view is solidly that this case is good news for Professional Contractors, Freelancers, Staffing Companies and Clients.
Recently two articles appeared on Contractor Calculator and ITContractor that also had some opinion on this case.
Dave Chaplin from Contractor Caculator made the point that in hisview now that (in certain circumstances ) Contractors may try to getemployment rights from their end Clients if they work within a contractcaught by IR35, all end Clients may look to engage Contractors oncontractual terms that are outside IR35.
Gerry McLaughlin of IT Contractor made the point that end Clientsmay not want to hire Contractors at all because of the Tilson case andfor fear of having Contractors aiming to get employment rights.
I guess everyone wants to make some news headlines but in between all this what is the real story ? Well here is our version:-
1. Andrew Tilson did not use his own Limited Company and thereforethis case does not mean that all inside IR35 contractors will haveemployment rights. We think that each case needs to be seen on itsmerits. But it may well mean that disgruntled Contractors may try toget employment rights, and it may mean that Clients will look carefullyat the way they engage Contractors.
2. This case can only be good for Contractors who want to be realcontractors, rather than be employees. At the end of the dayContractors are needed by clients, nothing has changed with this, theyfulfill a valuable role. It is up to each Contractor to use this casepositively.
3. This case can be used positively by contractors to help themnegotiate contracts that are outside IR35, its a big advantage if usedlike this.
4. Staffing companies can use this case with their End Clients tohelp them towards accepting real working arrangements that areconsistent with an outside IR35 contract. It is now in the EndClient's interest to do this and Staffing Comapnies could be seen in agood light helping End Clients adapt and protect themselves.
5. End clients who recognise the dangers of Inside IR35 Contractsmay now be proactive with engaging contractors on terms outside IR35,and adapt their working practices accordingly. They may get theemployment rights protection that they seek, and may even find theirspecialist contractors doing a good job for them, free from the shaklesof control found in employment contracts.
In summary the Tilson case is positive for clients that really wantindependent contractors and contractors who really want to run theirown business.
For those end clients that really want employees and those"freelancers" who really want employment, this case may well mean thatthey get what they want too.
On March 9th 1999 the IR35 legislation was announced in the Chancellors budget speech and a Press Release was issued.
The annoucement spawned the birth of the PCG, the Professional
Contractors Group and an abundant array of "get round ir35" schemes and
plans.
Many professional freelancers and contractors carried on their
business as specialist advisors to organisations that needed their
skills for a specific project or role, and many of those people are
still in business today.
The HMRC have had some notable wins against PCG supported IR35
cases, and the PCG have had a large amount of wins that dont all make
the headlines.
IR35 is still with us, and if you are seriously in business on your
own account there are still plenty of engagements that, in our opinion,
fall outside the IR35 net.
It takes some work, and some change in attitude for both the
freelancer and the client, but working outside IR35 is still a
reasonable possibility in many cases.
Was it all worth it for HMRC ? I havent seen any figures but my gut
feeling is that its not really done a great deal for them. The
introduction of the MSC legislation was cited by them as partly due to
the failure of the IR35 legislation being applied. The HMRC concern
over Umbrella Companies is due to their growth, which was dramatic
after the introduction of IR35.
It also still seems that HMRC are struggling to stem the tax loss on
some of the offshore schemes that are still being marketed, and they do
not seem to have the resources to effectively police the correct
implementation of IR35.
The choice is always down to the freelancer themselves if they apply
the legislation to their contract or not, this decision should be based
on the opinion of a profesional advisor.
In many cases we see, we can give the advice and our clients can
ensure that their business is set up correctly to provide a good
defence if their IR35 status is challenged. But at the end of the day
if the client is not prepared to do their bit then their status will be
more difficult to defend with HMRC, and we see clients that dont want
to do what they need to.
IR35 seems here to stay, but so is Professional Freelancing and Contracting, so here is looking forward to the next 10 years.
Shout99
reported recently on the case of J and C Littlewood (t/a JL Window
& Door Services(1) Mark Molloy(2) v Revenue & Customs [2009] .
It is not an IR35 case specifically but it does show us how Special
Commissioner John Clark was dealing with the HMRC's view that a number
of workers for the company were employes and not self employed
independent contractors.
The decision is certainly something we can use as a precedent in arguing IR35 status with HMRC.
Dave Smith from Accountax agrgued the case and his argument was
based on the lack of the "irreducible minimum" requirements that would
have made the workers contracts those of an employee.
This "irreducible minimum" has been established inn case law and upheld for years and can be summarised as :-
- Personal Service
- Control
- Mutuality Of Obligation ( MOO)
If any one of those three minimums are absent then case law
precedents should direct the commissioners to see the worker as self
employed. If all three are present then the commissioner will see the
worker as employed.
Dave Smith argued that that all three were missing, and so the workers were self employed.
The Commissioner decided that there was MOO for each piece of work
carried out, he also did not think there was any substitution right
available and so decided that there was personal service. However Mr
Clark concluded:-
"Although there was mutuality of obligation in the separate
contracts, JL Windows did not exercise a sufficient degree of control
over the workers to make itself master. This is sufficient to decide
that the workers were not employed under contracts of service, and
therefore to upheld JL Windows' appeal against the Notices and
Determinations, and Mr Molloy's appeal against the Notice of Decision.
I do not find the other provisions of the contracts consistent with
their being contracts of service. I find that the workers were in
business on their own account, albeit in a modest way. I do not
consider that the charge hands or the workers were part of JL Windows'
organisation. Both the appeals are allowed."
I think this is an interesting conclusion especially after all the
discussion on Dragonfly and Substitution. This case was decided on the
fact that there was not enough control by the client of the self
employed workers to render them employees. I think this is good news
for IR35 Status disputes , and Professional Contractors and Freelancers
may want to make sure that they obtain a Statement of Real Working
Arrangements that backs up both the Substitution Clause and Control
clauses in their contracts with a Staffing Company, and ensures that
their contract ( Lower Contract ) has no clauses that contradict the
contract between the Staffing Company and End Client ( Upper Contract ).
You can read the whole decision on Bailii.
The Larkstar case has been referred back to a new panel of General
Commissioners by the High Court as the it was held by Judge Sir Donald
Rattee that the first panel misdirected themselves in law.
This is certainly a shame for Alan Brill who had successfully
represented himself at the General Commissioners, even though he could
have claimed under his insurance policy as a member of the PCG.
When they lost at General Commissioners, HMRC appealed to the High
Court on the grounds that the commissioners had applied the wrong
tests; misdirected themselves in law in regard to control and mutuality
of obligation (MOO); and taken into account irrelevant matters.
The High Court rejected HMRC's first ground for appeal and held that
the process adopted by the General Commissioners, which was that of
looking at the hypothetical contract that would have existed between
Alan Brill and the end client was a valid test.
The High Court agreed with HMRC that the General Commissioners had
not taken into account the correct case law when looking at control and
mutuality of obligation, but did not agree that the other grounds for
appeal were valid.
ContractorCalulator published
it's opinion that HMRC seems intent on winning IR35 status cases even
where the amount of money to be gained is relatively small, infact
Judge Sir Donald Rattee commented that he was reluctant to go to the
expense of having the case heard again by General Commissioners, but
that there was little choice if the law had not been applied correctly.
Unfortunately we cannot reproduce the decision at the General
commissioners as they are never made public but reading the High Court
transcript there are some interesting points about this case that will
mean that it could be useful in the future, this in itself maybe why
HMRC want to pursue it.
- There were a series of agreements, but only one had a substitution clause in it.
- The substitution clause was never invoked and had some very restrictive rights of the client to security check substitutes.
- The contracts required the contractor to provide equipment, the
security arrangements at the client meant he was not allowed to do that.
- The contractor was deliberately set apart from the clients
organisation and badged as a contractor, his independence was what was
hired for the project and was important to the client as he was
involved in analysing, critiscising and testing the systems.
- The contractor had to redo unsatisfactory work.
- The client had no control over the work done by the contractor.
IR35 Status is decided by looking at the presence of a hypothetical
employment contract between the contractor and the end client and not
by proving self employment status of the contractor.
For this hypothetical contract to be seen as an employment contract
then you have to have all of the "irreducible minimum" of Personal
Service ( no practical substitution), Control and Mutuality of
Obligation ( MOO).
It seems therefore that this will be a case that looks very closely
at Control and so may well provide us some important precednts in the
future.
The PCG supported Alan Brill at the High Court Appeal and Shout99
reported that Managing Director of the Professional Contractors Group
(PCG), John Brazier said: "This case shows how important it is to have
expert advice from the earliest stage. Larkstar's owner Alan Brill did
very well to win his case at the General Commissioners, but he now
faces the prospect of having to go through it all again - only this
time he will have the support of PCG's advisers."
You can read the whole of the High Court decision at Bailii it is certainly worth a read for anyone wanting to keep up with the IR35 current case law.