There is a considerable amount of misinformation circulating regarding IR35. We hope the following clarifies our view of the correct legal position.

1. NEARLY ALL CONTRACTORS WILL BE CAUGHT BY IR35

   The Inland Revenue will say that most contractors will be caught while other sources believe that all contractors can avoid IR35. The application of IR35 depends upon the engagement and the individual contractor's business. According to informed sources upwards of 50% of contract engagements are legitimately project based and with the right contract and advice the contractor need not be caught by IR35.

2. A SUBSTITUTION CLAUSE IS ALL THAT IS REQUIRED

   A genuine right of substitution is a very important factor in determining self-employment status. However many attempts at including substitution do not take into account the relevant Case Law, the client's requirements and industry practice. There are important legal distinctions between assignment, substitution and sub-contracting that need to be taken into account and in the absence of actual substitution a clause may not be relied upon as saving the arrangements outside IR35.

3. THERE ARE MANY IR35 'PROOF' CONTRACTS/ THE INLAND REVENUE HAS APPROVED A CONTRACT

   There is no such thing as an IR35 “proof” contract as all of the actual working arrangements are relevant. Many so-called IR35 "proof" or “friendly” contracts are drafted without consideration for the real situation or the requirements of clients and agencies in the knowledge-based sector. To avoid the contract or clauses being labelled a sham, contractors should ensure that contracts are professionally drafted, industry specific and truly reflect the relationship. The Inland Revenue has, in individual cases, passed a number of contracts, including several contracts drafted by Lawspeed. The Inland Revenue has not approved a form of contract nor will it. The substance and the form are important and contracts must be tailored to accurately reflect each engagement.

4. THE CLIENT/ AGENCY CONTRACT IS NOT IMPORTANT

   This contract is relevant to the Inland Revenue and the Courts and should ideally mirror the terms of the agency/contractor contract. Although the service company is not a party to the client/agency contract the IR35 legislation looks at the commercial relationship between the worker and the end client as evidenced by all of the contracts involved. It would be unwise to rely upon the agency as being interpreted as the client in the legislation.

5. THE IR35 LEGISLATION MAY BE CHANGED OR ABANDONED

   The Finance Bill 2000 containing the IR35 clauses has been debated in the House of Commons and was given Royal Ascent on July 28, 2000. This was tested in Court by the PCG in its judicial review. The PCG lost. The government extended the legislation in April 2003 to apply to domestic hirings. There is little likelihood that the tax will be discarded. It is therefore important that contractors and accountants are aware of the options available and the best strategies.

6. CONTRACT AMENDMENTS ARE STRAIGHTFORWARD

   A thorough understanding of the relevant case law, contract law, agency practices and industry realities is required to draft an appropriate contract. Significant financial liabilities may follow from a poorly drafted contract, both in general terms and more specifically if subsequently caught by IR35.

7. THE DECISION IS ENTIRELY BASED ON THE CONTRACT

   This is wrong as the Inland Revenue can look at all of the working arrangements. In addition to the contract, the schedule and description of the work must be properly drafted and must accurately reflect a project-based engagement. Even if the contract contains all the terms associated with self-employment the work undertaken and the contractor's business practices need to be properly constructed.

8. COMPOSITE COMPANIES OFFER A SAFE HAVEN FROM IR35

   Most composites could not be described as being in the business of providing services to the contractor’s client since they are in business primarily to provide services to the contractor. They therefore fail the “in business” test of IR35. In addition since their members comprise a number of different contractors if any one working arrangement is subject to IR35 the tax will be due from the composite as a whole. This makes it possible that all of the contractors in the composite will suffer part of the tax loss. Also any composite is an easy target for the Inland Revenue to investigate and arrangements that are set up to evade, as opposed to avoid, tax could result in criminal charges. Composites generally do not offer a safe haven and any contractor wishing to use one should seek independent advice first and proceed with caution. The general rule is “if it looks too good to be true, it probably is”.

9. ALL YOU NEED TO AVOID IR35 IS TO BE IN BUSINESS ON YOUR OWN ACCOUNT

   This argument, still put forward by some advisers, was run in the last Tax Commissioner case of Synaptek –v- Inland Revenue. The contractor failed despite there being plenty of evidence that he was in business on his own account. Any genuine business could be subject to IR35 if the working arrangements reflect a personal service that would be akin to employment in the circumstances set out in the legislation.

10. USING A CONTRACT THAT HELPS YOU OPERATE OUTSIDE IR35 IS A CRIMINAL OFFENCE

    The Inland Revenue accepts that many arrangements are not caught by IR35. Those arrangement must by definition be recorded in a written contract, so it cannot follow that such contracts give rise to a criminal offence. Parties to a contract are free to agree any terms they wish, so long as the only reason for recording a term is not purely to avoid payment of tax which would otherwise be due. Tax evasion, which could lead to criminal charges, involves a deliberate attempt to avoid tax and would generally require all parties to the contracts to act with deliberate dishonesty. That is not the case if a contract is drawn to reflect the working arrangements. In fact in many cases standard generic contracts issued by end user clients do not reflect the agreed work or the circumstances of supply.

FACT:

1. Many contractors can legitimately operate outside IR35
2. Obtaining proper legal advice before you enter into a contract could literally pay dividends and save thousands of pounds in tax
3. Lawspeed is a specialist legal services provider and has helped contractors interim managers and freelancers in this and other tax areas since 1999.

See how Lawspeed has helped contractors interim managers and freelancers.

For more information call Lawspeed on 01273 236236 or contact us .

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