Worried about IR35 – but will an umbrella company shelter you from the tax man?!

Worried about IR35 – but will an umbrella company shelter you from the tax man?!
At one point it seemed as though HMRC’s radar was focused solely on the Construction Industry, but now their gaze has fallen hard and fast on limited company contractors (yet again).  In the last month Accountax have seen a 162 % increase in the number of IR35 enquiries instigated by HMRC.
These enquiries, spurred as usual, off the back of Compliance visits and HMRC’s new powers of inspection see HMRC firing on all cylinders, and doubling their resources for compliance.
It is now more important than ever to ensure your company is fully compliant and know what the law says.  Fundamentally though you must get it into your head that as soon as HMRC write to you or your accountant requesting a Compliance visit they will look at IR35.  Do NOT be lulled into a false sense of security that IR35 is not in their mind.  It is.
Secondly you must not be swayed from your arguments.  Comes down to three fundamental criteria:
Personal Service:  Are you obliged to do the work yourself?  If not, then IR35 cannot apply.  Do you have a right to send a substitute?  Is the substitute only vetted to check skills, qualifications or experience?  If this is the case you are not obliged to provide personal service and as such IR35 does not apply – you do not have to SEND a substitute, the right to send one is sufficient.
Control:  Are you told how to do the work?  If not, then IR35 cannot apply.  If the manner in which you provide the services is your own (ie you determine how you will design, approach, develop and actually carry them out) this is sufficient.
Mutuality of Obligations:  Are you obliged to do the work, and is there an obligation to provide you with work.  If no such obligation exists IR35 cannot apply.
HMRC must establish all 3 criteria exist before IR35 can apply.
In Business factors: the final consideration is the “in business” test.  Do you invoice?  Do you have insurances? Do you have company equipment and materials?  Are you identified separately as a contractor?  These factors will all help to demonstrate you are in business on your own account, but they do not determine IR35 on their own.
Obviously these factors, on the face of it, are fairly straightforward.  The problem arises due to badly drafted contracts which do not contain clearly how the contractor provides the services.  Most limited company contractors I have dealt with would not tolerate, nor adhere to, being treated like an employee by the end client.  The problem is the contract does not reflect this.
Agencies are slowly realising the dangers of IR35 (which has taken long enough), and now is the time for contractors to strike and ensure they get their contracts reviewed properly and negotiate with the agencies to implement the terms they want!  It can be done – persistence is not futile!
What contractors must not do is jump ship to umbrella companies merely because they are scared of IR35 – you may simply be jumping out of the frying pan into the fire!  Umbrellas received a mention in the Pre Budget Report, yet again, warning of a consultation process.  While I do not practically see how HMRC could possibly legislate against Umbrella companies, HMRC have increased their efforts in targeting umbrella companies and Accountax are now dealing with double the amount of Umbrella company investigations.
Not all umbrella companies will fall foul of HMRC, and not all should be avoided, however there are still a great many who exploit the expenses legislation and play on a contractors fears of IR35.  Umbrella companies work well for a number of individuals but they do not work for everyone!
Things contractors should beware of:
“fully IR35 compliant”.  IR35 does not, and can not, apply to umbrella companies.
“approval”.  Third party “approval” or “accreditation” does not mean the umbrella is compliant, it simply means someone has checked them for MSC implications, and not for basic compliance.  This is of little benefit to a contractor.  Accountax have seen a number of umbrella with third party approval for MSC implications fall foul of HMRC because they have not operated expenses, employers’ obligations etc properly.  If an Umbrella company has not paid your tax across, or processed your expenses correctly HMRC can pursue you for the liability.
“option”, “solution”, “scheme”.  Be wary of companies offering a variety of options or solutions and various tack on services such as recommending accountants etc.  Any company stating on a website they offer “solutions” are sure to be high up on HMRC radar and attract unwanted attention.  If they are offering a “one stop shop” it is likely they will be considered a scheme by HMRC and caught by the MSC legislation.
“dispensation”.  Any company promoting the fact they have a dispensation as part of their marketing strategy should be viewed with caution.  A dispensation does nothing more than “dispense” with the umbrella company’s need to produce a P11D.  It does not allow you to claim expenses you have not actually incurred, if a company is telling you this you could find yourself personally liable.
These are just a few things to be wary of, unfortunately for contractors for every one umbrella which operates correctly there are a dozen who do not.  Umbrellas can work well for contractors, but likely if a limited company is suitable for you an umbrella would not be. Your best bet is to get your IR35 position checked thoroughly by a professional adviser who can back up their claims (do they represent at tribunal level for example).  One golden rule – DO NOT JUMP FROM YOUR LIMITED COMPANY WITHOUT ADVICE.

At one point it seemed as though HMRC’s radar was focused solely on the Construction Industry, but now their gaze has fallen hard and fast on limited company contractors (yet again).  In the last month Accountax have seen a 162 % increase in the number of IR35 enquiries instigated by HMRC.

These enquiries, spurred as usual, off the back of Compliance visits and HMRC’s new powers of inspection see HMRC firing on all cylinders, and doubling their resources for compliance.

It is now more important than ever to ensure your company is fully compliant and know what the law says.  Fundamentally though you must get it into your head that as soon as HMRC write to you or your accountant requesting a Compliance visit they will look at IR35.  Do NOT be lulled into a false sense of security that IR35 is not in their mind.  It is.

Secondly you must not be swayed from your arguments.  It comes down to three fundamental criteria:

Personal Service

Are you obliged to do the work yourself?  If not, then IR35 cannot apply.  Do you have a right to send a substitute?  Is the substitute only vetted to check skills, qualifications or experience?  If this is the case you are not obliged to provide personal service and as such IR35 does not apply – you do not have to SEND a substitute, the right to send one is sufficient.

Control

Are you told how to do the work?  If not, then IR35 cannot apply.  If the manner in which you provide the services is your own (ie you determine how you will design, approach, develop and actually carry them out) this is sufficient.

Mutuality of Obligations

Are you obliged to do the work, and is there an obligation to provide you with work.  If no such obligation exists IR35 cannot apply.

HMRC must establish that all 3 criteria exist before IR35 can apply.

In Business factors

the final consideration is the “in business” test.  Do you invoice?  Do you have insurances? Do you have company equipment and materials?  Are you identified separately as a contractor?  These factors will all help to demonstrate you are in business on your own account, but they do not determine IR35 on their own.

Obviously these factors, on the face of it, are fairly straightforward.  The problem arises due to badly drafted contracts which do not contain clearly how the contractor provides the services.  Most limited company contractors I have dealt with would not tolerate, nor adhere to, being treated like an employee by the end client.  The problem is the contract does not reflect this.

Agencies are slowly realising the dangers of IR35 (which has taken long enough), and now is the time for contractors to strike and ensure they get their contracts reviewed properly and negotiate with the agencies to implement the terms they want!  It can be done – persistence is not futile!

What contractors must not do is jump ship to umbrella companies merely because they are scared of IR35 – you may simply be jumping out of the frying pan into the fire!  Umbrellas received a mention in the Pre Budget Report, yet again, warning of a consultation process.  While I do not practically see how HMRC could possibly legislate against umbrella companies, HMRC have increased their efforts in targeting umbrella companies and Accountax are now dealing with double the amount of umbrella company investigations.

Not all umbrella companies will fall foul of HMRC, and not all should be avoided, however there are still a great many who exploit the expenses legislation and play on a contractors fears of IR35.  Umbrella companies work well for a number of individuals but they do not work for everyone!

Things contractors should beware of:

“fully IR35 compliant”. IR35 does not, and can not, apply to umbrella companies.

“approval”.  Third party “approval” or “accreditation” does not mean the umbrella is compliant, it simply means someone has checked them for MSC implications, and not for basic compliance.  This is of little benefit to a contractor.  Accountax have seen a number of umbrellas with third party approval for MSC implications fall foul of HMRC because they have not operated expenses, employers’ obligations etc properly.  If an umbrella company has not paid your tax across, or processed your expenses correctly HMRC can pursue you for the liability.

“option”, “solution”, “scheme”.  Be wary of companies offering a variety of options or solutions and various tack on services such as recommending accountants etc.  Any company stating on a website they offer “solutions” are sure to be high up on HMRC’s radar and attract unwanted attention.  If they are offering a “one stop shop” it is likely they will be considered a scheme by HMRC and caught by the MSC legislation.

“dispensation”.  Any company promoting the fact they have a dispensation as part of their marketing strategy should be viewed with caution.  A dispensation does nothing more than “dispense” with the umbrella company’s need to produce a P11D.  It does not allow you to claim expenses you have not actually incurred, if a company is telling you this you could find yourself personally liable.

These are just a few things to be wary of, unfortunately for contractors for every one umbrella which operates correctly there are a dozen who do not.  Umbrellas can work well for contractors, but likely if a limited company is suitable for you an umbrella would not be. Your best bet is to get your IR35 position checked thoroughly by a professional adviser who can back up their claims (do they represent at tribunal level for example).  One golden rule – DO NOT JUMP FROM YOUR LIMITED COMPANY WITHOUT ADVICE.

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