The so called “IR35” legislation is enacted in Schedule 12 Finance Act 2000 (which deals with tax) and the Social Security Contributions (Intermediaries) Regulations 2000 (which deals with National Insurance). IR35 is the name of the press release issued by the Inland Revenue announcing the impending legislation in April 1999 and the name has been adopted as a generic name for the legislation ever since.

The principles are that where an individual is providing services to a client for the purposes of the business of the client and the contract arrangements are through a third party (the intermediary), the intermediary, which is usually the personal service company of the individual, is liable to pay the tax if the arrangements would amount to employment for tax purposes had the arrangements been direct between the individual and the client.

Accordingly the Inland Revenue is entitled to look at the contracts and all the working arrangements on the hypothetical basis that the arrangements between the individual and the client were direct, without including the intermediary or any third party. All the working arrangements are relevant. Of primary importance is the work and nature of the work, and the contracts, which the personal service company enters into either direct or through an agency, only serve as supporting evidence – although that supporting evidence can often be strong. If the engagement would have been one of employment if it were not for the existence of the intermediary, the tax is payable by the intermediary.

The test of liability is wholly legal and is a test based upon employment status. As such, in order to advise correctly it is of absolute importance that the adviser has a strong understanding of employment law and the principles involved. Those principles include a good grasp of contract law and the meaning of clauses aswell as comprehension of the intention of the parties to the contract. Most accountants would not fall into this category, although the advice market is dominated by accountants seeking to provide IR35 advice as a lure to provide accountancy services.

In our opinion there is no easy solution to IR35 as each case turns on its own merits. However the work must generally be project based and the written contract and the actual working arrangements should reflect that. It is of no use to have a contract that states the position is one thing if the working arrangements actually are another. The Inland Revenue has the power to investigate every case if it so chooses and can obtain information from the agency and the client as well as the contractor.

However the Inland Revenue has in our view consistently overstated the circumstances in which IR35 will apply, and rumour, speculation and information on the Inland Revenue website has led to certain myths being created. See 10 myths. The reality is that if the work is project based, the contract reflects the work and the contractor is genuinely in business, IR35 should not apply. We have obtained agreement from the Inland Revenue that IR35 does not apply in cases where the contractor was engaged for periods up to 5 years. Many contractors have needlessly ceased to operate through limited companies because of these myths or uninformed advice.

The Inland Revenue offers a preliminary opinion service to review arrangements to advise whether IR35 applies. Taking advantage of that service can be helpful but contractors should ensure that they seek specialist advice before doing so.

We recommend that Contractors interim managers and freelancers seek proper objective advice before

• concluding that IR35 applies to their arrangements , or
• entering into any dealings with the Inland Revenue on issues relating to IR35

Lawspeed is a specialist legal adviser in this field and has assisted thousands of contractors interim managers and freelancers since 1999. For more information call 01273 236236 or contact us.

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