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Judgement was handed down on Friday 28/03/03 in the much-vaunted IR35 High Court case of Synaptek v IR, also known as the Stutchbury case. The Court found in favour of the Revenue, confirming the original ruling that IR35 did apply to the arrangements between Mr Stutchbury and his end client, EDS.

DETAILS

The IR35 legislation is enacted in the Finance Act 2000 and came into effect from April 6 2000. There has been much talk about the drastic effects of IR35 and if there is anything that can be done to avoid or minimise the impact. Various inventive accounting solutions have been proposed but these may amount to tax evasion and the Inland Revenue is aware of most of them or has advised the Government to enact legislation to close potential loopholes. Regardless of the structure or financial operations of a limited company, the Inland Revenue is primarily concentrating on the working relationship between the contractor and the client. In most cases the client can be construed as an agency and/or an end client but we would be wary of relying on the view that only the agency can be regarded as the client for the purposes of the legislation. See our analysis of the 10 myths associated with IR35.

There are undoubtedly contractors that are engaged in a manner very similar to that of an employee and under IR35 they will now be taxed as an employee. However, many factors need to be considered when determining IR35 status and it is best not to jump to conclusions. The difficulty is that there is no statutory definition of employment so reference must be made to case law precedents to determine the IR35 status of an engagement. The most feasible way for a contractor working through a limited company to avoid IR35 is if the relationship and circumstances reflect that of "self-employment". See our basic checklist to assist you to determine if IR35 applies to your arrangements.

In the right circumstances Lawspeed is able to provide direct contracts or review and redraft agency or direct contracts to deal with the issues of IR35. An IR35 friendly contract will cover the important employment status tests such as control, substitution, mutuality of obligations, financial risk, basis of payment, exclusivity, integration and provision of equipment. In order to successfully operate outside IR35 it is essential that the nature of the work be truly project-based and this is reflected in the schedule and that the contractor can demonstrate a proper business set-up. The only other way around IR35 is to establish a genuine, unquestionable right of substitution but this may be difficult for many contractors who have been engaged for their particular expertise.

To support a claim that the contractor is 'in business on his own account' they should be able to demonstrate that they have invested in their company. Typical investments would include Professional Indemnity insurance, office equipment and tools, a PC or laptop, business stationery and an investment of time and money into training.

Many factors need to be considered when determining IR35 status and deciding whether or not an arrangement is caught can be difficult. It is well known that the Inland Revenue issues guidance on IR35 and offers its own review service, but many industry advisors have been critical of the quality of that guidance. It is possible to obtain a positive opinion from the Inland Revenue but it is necessary to formulate a detailed submission or appeal that contains the correct technical arguments and case law precedents. Where cases have been concluded we have a 100% success record of achieving positive results for our clients. In two recent successes, the contractors had been engaged by their clients for 3 and 5 years respectively. This demonstrates the importance of taking on legal representation.

It is also possible for Abbey Tax Protection to separately provide contractors with IR35 Tax-Safe Insurance to insure against potential losses arising from an Inland Revenue investigation that results in an adverse decision on IR35 status and a demand for unpaid tax, NI, interest and penalties. Lawspeed provide a range of services to assist contractors with IR35 and dealing with the Inland Revenue, see here for details.

Lawspeed held a seminar in London in 2002 covering IR35 and effective methods for legitmately operating outside the tax rules. Please contact us if you would like further information regarding Lawspeed's Seminars for contractors, interim managers, accountants and agencies.