Over the last month there has been a lot in the press about freelancers and we wanted to take the opportunity to give you our views on these hot issues.
Firstly you may have seen a document which HMRC added to their website in early May titled Intermediaries Legislation (IR35) Business Entity Tests. We have had calls from clients worried that this is new legislation- it isn’t - it is merely HMRC trying to re-target their IR35 review methods by means of a pilot exercise.
The tax law relating to IR35 is the same as it always has been, as is the related contract law and case law, ie. the legal precedents set by court cases about IR35. HMRC will therefore continue to face the same difficulties in future as they have in the past in trying to enforce this ineffective legislation.
Because of the contentious nature of IR35, and the potentially large amounts of additional tax and NIC due under IR35, any attempt to impose it will never be settled simply by agreement between the taxpayer and HMRC. These attempts will always be referred to an independent tribunal. The tribunal must judge the referral on the basis of the unchanged legislation and case law which has always been such a problem for HMRC. They will not use the Business Entity Tests in HMRC’s document.
New contracts should always be referred to us and checked for IR35 risk before they are signed.
After much resistance HMRC were forced to reveal figures of recent IR35 investigations and the extra tax paid as a result. In the 2 years to 5/4/2011 only 25 IR35 investigations by HMRC were settled which resulted in further tax being paid. The amounts of tax were £155,000 in the first year and £219,000 in the second. These figures cover the whole of the UK.
Secondly there was wide press coverage when it was revealed that the chief executive of the Student Loans Company was operating as a freelancer. As a result of the outcry the Government proposes to modify the IR35 rules for contractors whose work involves them acting as “controlling persons” in their end-user’s organisation.
It is very unlikely that you will be troubled, as the definition of such “controlling persons” as presently proposed, is very limited in its scope. A “controlling person” is defined, as someone “who is able to shape the direction of the organisation - having authority or responsibility for directing or controlling the major activities of the engaging organisation during the year. This would be someone who has managerial control over a significant proportion of the organisation’s employees, and/or control over a significant proportion of the budget of the organisation.” Freelancers are not usually in these positions.
The plan is that such “controlling persons” will be put on the payroll of the end-user, and taxed as employees of the organisation they are controlling.
The changes, for “controlling persons” contracts, which both, last over 6 months, and have a day rate of over £220, are planned to be introduced for engagers within the public sector in September.
For private sector engagers the proposed changes will not come into effect for at least a year.
If you think you might be a “controlling person”, as defined, or you want to know more please contact Clara Torres.
An IT Contractor has recently won her IR35 status case after a long struggle with HM Revenue & Customs.