Tag Archive | "Direction & Control"

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.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image:  danger for baby 2 by efilpera

Posted in ir35 contract review, ir35 insurance, ir35 rules, umbrella companiesComments (0)

I’m a freelancer – but will my contract pass IR35?


Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

The intention of IR35 is very simply expressed: if you are working as an employee of your client then you should pay the same taxes as an employee of that client. You can’t avoid paying those taxes simply by saying you are a freelance contractor, you have to be able to prove it.

Proving it, though, is not that simple. IR35 does not set hard and fast rules that would allow a clear-cut decision.

Let’s start with the contract. The basis of any IR35 judgement centres on the three key employment indicators, Direction and Control, an irreducible minimum of Mutuality of Obligation and a reasonably unfettered Right of Substitution. In theory, the clear presence of any of those three in a contract would take that contract outside IR35. In practice, they are never that clearly defined unless the contract has been very carefully drafted. Therefore any contract you use must be checked for these factors and if necessary changes made to define them correctly. This requires expert opinion from someone with demonstrable expertise in this field. What you should never do is use HMRC’s own free contract assessment service; that is a guaranteed loser.

However the contract is only part of the story. The final judgement will take account of the totality of the arrangements and the intent of all the parties involved. So you may have a safe Right of Substitution in the contract, but if the client is never going to allow you to invoke it then it has no value as a defence. This was the major conclusion of the Dragonfly case, that the working arrangements and the contract have to be fully aligned.

It is therefore very hard to state categorically that a contract will pass or fail IR35. You should take great care to ensure the contract is properly assessed and amended and you must fully understand the nature of the engagement. Then, if you are challenged by HMRC, you have the tools to mount a decent defence. And because you have taken steps to assure yourself of your IR35 status, if you do lose there won’t be any additional penalties.

That defence, however, requires expert support and guidance. Most if not all of the lost IR35 cases have been where the contractor represented themselves. Make sure you have effective insurance to cover the cost of expert advice and representation. A few hundred pounds will protect you from the average £15,000 costs of a defence. And, more importantly, it will buy a great deal of peace of mind.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: yes!_no? by Fernando Takai

Posted in ir35 contract review, ir35 insurance, ir35 rulesComments (0)

IR35 – So Let’s Use “Control” to Our Advantage


We know (or we should know) that Control is a key element in determining your IR35 status. To be precise, one of the key characteristics of a Master/Servant relationship, on which employment tests are based, is that the worker is under the Direction and Control of the end client.  The D&C test used in IR35 cases is based on the premise that if the Client can tell you where and how to perform your work, then an employee-like relationship exists and you are inside IR35.
Except, of course, it really isn’t that simple. Control may look like a black and white distinction, but in fact it is many shades of grey. Is it Control if the client insists a first-line support worker is on site at the same time as the users they are there to support? Or the worker has to use the client’s hardware, usually because the client doesn’t want someone else’s equipment plugged into his network (and he doesn’t see why he should spend time and effort validating such equipment for use)? Or that the worker has to adhere to the client’s coding standards? Or that a tester has to have his work periodically reviewed for quality?
All the above have actually been argued in recent IR35 cases. Only one was found to represent control. That was in Dragonfly, which judgement was sufficiently off the wall that it can be ignored in this context (although what Dragonfly did settle is that reality and contract have to be aligned).
Actually I suspect this whole issue of D&C, to the client, is very simple: they want the worker to deliver what they want delivering and usually aren’t all that bothered about precisely how it is delivered. The people that get worked up about where contractors sit and when they are at their desk are usually the middle managers, not the executive
Also, the reason it gains such prominence in agency contracts is nothing to do with IR35 but everything to do with whose fault it is if the worker screws up. The agency wants the client to be “in control” because then if the worker does make a mess of things, there’s no comeback on the agency. This, of course, ignores the fact that most agencies actually sell their services on the basis of having their very own stable of excellent people readily to hand.
Either way, what we need is a clear definition of Control in the context of a client/worker relationship. And that could then be used to our advantage. If that definition exists as an accepted term, then we can say to the client that Control is exercised or it is not. If it is, and you want full control over my work, then you are responsible for paying my taxes and I’ll take the balance, because you want to treat me as an employee, then you can have the extra overheads that an employee would demand. If it is not, then pay me gross and I am liable for all my taxes; in fact the relationship is now clear, so why not use a simple B2B contract in stead of that complex, ambiguous pseudo-employment one you’re used to having?
And if we can do all of that, then IR35 evaporates in a puff of smoke…

We know (or we should know) that Control is a key element in determining your IR35 status. To be precise, one of the key characteristics of a Master/Servant relationship, on which employment tests are based, is that the worker is under the Direction and Control of the end client.

Direction & Control

The D&C test used in IR35 cases is based on the premise that if the Client can tell you where and how to perform your work, then an employee-like relationship exists and you are inside IR35.

Except, of course, it really isn’t that simple. Control may look like a black and white distinction, but in fact it is many shades of grey. Is it Control if the client insists a first-line support worker is on site at the same time as the users they are there to support? Or the worker has to use the client’s hardware, usually because the client doesn’t want someone else’s equipment plugged into his network (and he doesn’t see why he should spend time and effort validating such equipment for use)? Or that the worker has to adhere to the client’s coding standards? Or that a tester has to have his work periodically reviewed for quality?

All the above have actually been argued in recent IR35 cases. Only one was found to represent control. That was in Dragonfly, which judgement was sufficiently off the wall that it can be ignored in this context (although what Dragonfly did settle is that reality and contract have to be aligned).

Actually I suspect this whole issue of D&C, to the client, is very simple: they want the worker to deliver what they want delivering and usually aren’t all that bothered about precisely how it is delivered. The people that get worked up about where contractors sit and when they are at their desk are usually the middle managers, not the executive

Also, the reason it gains such prominence in agency contracts is nothing to do with IR35 but everything to do with whose fault it is if the worker screws up. The agency wants the client to be “in control” because then if the worker does make a mess of things, there’s no comeback on the agency. This, of course, ignores the fact that most agencies actually sell their services on the basis of having their very own stable of excellent people readily to hand.

IR35 Definition

Either way, what we need is a clear definition of Control in the context of a client/worker relationship. And that could then be used to our advantage. If that definition exists as an accepted term, then we can say to the client that Control is exercised or it is not. If it is, and you want full control over my work, then you are responsible for paying my taxes and I’ll take the balance, because you want to treat me as an employee, then you can have the extra overheads that an employee would demand. If it is not, then pay me gross and I am liable for all my taxes; in fact the relationship is now clear, so why not use a simple B2B contract in stead of that complex, ambiguous pseudo-employment one you’re used to having?

And if we can do all of that, then IR35 evaporates in a puff of smoke…

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited

Image: Kids, be nice or I shoot by Stefan

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