There's a very interesting and useful article here (free registration required) by an IR35 specialist on the result of four different cases that have just been concluded before the Special Commissioners, one of the arbiters of disagreements between taxpayers and HM Revenue and Customs.
If you're affected by it then you'll probably know what IR35 is. Basically, many years ago, a lot of workers - particularly in the IT industry - began to offer their services to potential employers/customers via limited companies. That way, they paid significantly less tax than they would if they were paid via PAYE. In some cases, an employee would leave their desk at 5.30 on Friday, come back at 9.00 on Monday and do exactly the same tasks for their former employer. However, they'd pay much less tax because they had put a limited company between them and their employer.
This went on for some time, until the government decided to crack down on it. IR35 essentially says that if what you are doing via your limited company has the characteristics of a job then, despite the limited company, you need to take your money via PAYE, thus losing most or all of the tax saving. Sadly, IR35 was so grey that it was very hard to be sure if it applied or not to a worker, and most of them decided to carry on as before and hope the Revenue didn't ask questions.
In most cases, this policy was a success. The Revenue didn't have the resources to look at all the potential IR35 "victims", or even a tiny proportion of them. However, the article I've linked to discusses four workers who did get picked out by HMRC, and have since been going through the lengthy process of arguing with the Revenue over whether IR35 applies or not. Two of the taxpayers won their cases, two lost. In one case, it has taken six years to establish that IR35 doesn't apply. That will have been a very stressful six year period for the taxpayer concerned.
Most interestingly, one taxpayer who lost his case largely lost not because of their own evidence but because of their customer/employer's evidence. A common way to try to ensure you're not subject to IR35 is to insert a "subsitution clause" into the contract between your company and its client - basically, a clause that says you don't have to do the work yourself, you can send someone else to do it. But this tactic is only effective if the clause could actually be used - not if it's just for show. A representative of the customer was asked if he'd have been happy if the taxpayer had actually sent a substitute in his place. Absolutely not, was the answer. They had entered into the contract because they wanted the taxpayer himself. Game over. In another case, the taxpayer himself (unrepresented by an expert at that point, unfortunately for him) confirmed personally to the taxman that the customer would not have allowed him to send a substitute. Admirably honest, but perhaps inadvisably so. Game over.
The overall conclusion has to be something that most accountants and tax advisers, including me, always tell clients. When IR35 came in, many IT employment agencies put a lot of effort into coming up with watertight contracts. But what the contract says doesn't matter if it doesn't match up with reality.
If you need advice on IR35, do give us a call.
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