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IR35

IR35 legislation is both complex and confusing, especially for the first time contractor. It is often the main concern of contractors.See our blog for advice for guidance on IR35

Seven year high in IR35 investigations

The period since 2011-12 has seen a quadrupling in the number of new IR35 investigations into consultants and freelancers using limited companies, the many freelance clients of Canary Wharf accountants may be interested to read. It brings the number of enquiries in a 12 month period to the highest level for seven years, according to official data.

No doubt that many Canary Wharf accountants and their clients will have taken note of the new figures recently released by HM Revenue & Customs (HMRC), showing that in the 12 months from April last year, 256 IR35 enquiries were launched. This compares to a mere 59 in the previous tax year, 2011-12.

It equates to a greater number of freelancers and contractors facing an IR35 investigation in 2012-13 than in all of the previous five tax years put together, which saw a total of 223 enquiries being made under the legislation. The latest data vindicates HMRC’s earlier pledge to MPs that the target of 230 IR35 probes a year would be exceeded.

However, this figure is a long way shy of the 2,000 enquiries a year that the website of the freelancers’ trade body, the PCG, had claimed to have been made under the rule in the five months since May 2012. Indeed, according to HMRC data, even the 1,000 barrier of total IR35 investigations has only been broken twice, in 2003-04 and 2002-03, when there were 1,166 investigations and 1,016 investigations respectively.

However, the 2012-13 figure is still the highest that it has been for some time, freelancers making use of Canary Wharf accountants may be intrigued to know. Indeed, one has to look back to 2005-06 to find a higher figure, with 656 investigations having been launched that year.

As for the current 2013/14 tax year, the first six months have seen 112 IR35 investigations carried out, a Lords committee investigating personal service companies was told. This is well short of the 193 IR35 investigations that had already been launched at the same point in 2012-13. However, the 112 figure still constitutes almost one investigation per day being opened by HMRC since the commencement of the current tax year.

As HMRC’s employment status team leader, Robin Wythes, stated to the Personal Service Companies Committee, the 112 cases launched thus far were “all cases that we consider to represent a high risk of IR35… i.e. those companies where, generally, we believe all their contracts of the year would be within IR35.”

In other news of relevance to contractors making use of Canary Wharf accountants, HMRC officials also revealed a fall in the average duration of an IR35 enquiry, from 110 weeks and 140 weeks in previous years, to 28 weeks in the current tax year. Mr Wythes said that “Possibly, in truth for the first time, [HMRC is] trying to see IR35 from the view of the worker,” also asserting the need for Business Entity Tests – part of last year’s released IR35 guidance – to be made “fit for purpose.”

The basics of the right freelance contract

Freelancers like those taking advantage of Freelancer Accounting’s (http://www.freelanceraccounting.com) accountancy services work from contract to contract, so as the months and years pass, they will become especially well-versed at spotting the important factors in securing the right one. They say that an oral contract is ‘not worth the paper it is (or isn’t!) written on’, and although that is by no means true in every way, a contract in writing definitely leaves no doubt as to the parties’ joint commercial intentions and visions.

Ensuring that each of their contracts is in writing is therefore rightly the first priority of most savvy clients of contractor accountants. There are two basic parts of a contract – the commercial provisions and the legal background – the former tending to be in the form of a schedule and the latter making up the body of the agreement. The commercial provisions will include information on the parties, dates and the basis on which payment is made, as well as – most importantly – the work that is to be undertaken.

In fixed-priced contracts, there should be clearly set boundaries for the services that are to be provided, so that contractor accountancy clients aren’t at the receiving end of what is known as the ‘evolving spec’, or the ‘just jobs’ – in other words, the tendency for a client to give ‘just one more job’ to do within the contract. After all, you will have probably priced the job on the basis of what you judge to be the time and resources required to do the work and what the customer is willing to pay.

The part that covers the legal background, meanwhile, will include terms that will probably be the same for all of the work that you carry out for that client. Sections may be included in broad relation to ‘how’ each party will fulfil its end of the contract, which for you, could cover such issues as the quality of your work or responsibility for work that is defective. For the client, meanwhile, the likes of detailed payment provisions are likely to be included here. Also included in this section of the contract will be provisions affecting both parties, relating to such areas as termination, confidentiality and IPR.

Across all of these provisions, the client of a PCG accountant should ensure that the contract is understandable. Although you may benefit from a lawyer’s help in the production of the contract, you shouldn’t require one to understand what it says and means. The best contracts will always be clear and unambiguous in what they mean, with any third party reading it being able to understand its terms. After all, the document will be an invaluable point of reference for both parties, particularly in avoiding potential disputes.

The controversial and often confusing IR35 legislation should also not be far from your mind when you are putting together a contract – and the IR35 accountants of Freelancer Accounting (http://www.freelanceraccounting.com) can help to ensure that your contracts support your compliance with the law.

IR35 accountants – how important are they?

If there is one subject that makes any experienced contractor’s blood boil, it may well be IR35. Indeed, it has been the cause of considerable consternation among contractors for more than a decade now, with the Professional Contractors Group (PCG) having been formed in response to it. So, what has IR35 done to give rise to such ire over the years, and why might you appreciate the services of the IR35 accountants here at Freelancer Accounting (http://www.freelanceraccounting.com)?

Well, first of all, we need to properly establish what IR35 is. Termed ‘The Intermediaries Legislation’ in 2000, IR35 was announced in 1999 with the aim of stopping people working through their own personal service company whilst performing work as if they were an employee, all so that they could allegedly avoid tax. The target was individuals who set up as a contractor and worked through a Limited Company, and who could therefore, until that moment, be taxed as if they were self-employed – despite the work itself barely distinguishing them from an employee.

An example cited by HMRC is of an IT specialist leaving his permanent job one Friday before returning the following Monday as an IT contractor working through his own limited company. Despite doing exactly the same work as previously, he is only paying himself a small salary – on which tax and NIC is payable – with dividends providing most of his income, meaning that he pays less tax and national insurance. In reality, however, the legislation has been condemned by PCG on account of its “unfairness and complexity”, which highlights the necessity of accountants for contractors to advise on matters relating to IR35.

IR35 is seemingly clear in that it applies to those who carry out work through “intermediaries” to an end user under circumstances in which, if there was a direct contract between the contractor and the end user, it would be one of employment. However, the legislation is also so complex that contractors frequently struggle to correctly assess whether or not they fall within it, with their status possibly being dictated by contracts that they have never seen. That is unfortunate, not least given that those contractors who are outside IR35 pay considerably less tax than those inside it.

It’s obvious, then, that for contractors, it pays to find specialist accountancy services that can advise them on their IR35 status and make it easier for commercial relationships with clients to be constructed that are outside IR35. Although numerous cases have arisen that have made IR35 a little easier to understand, it remains the bane of many a contractor’s existence. Plus, with so many myths still flying around about IR35, it’s never been more important to have a PCG accountant by your side to ensure that you avoid the remaining pitfalls.

Visit http://www.freelanceraccounting.com now to find out more about the affordable services of our well-qualified and experienced accountants in London.