21 May 2012

HMRC IR35 Update

HMRC have now announced guidance on how they assess whether IR35 may apply to a service company.

Our spreadsheet enables you to easily take the "test" although be warned almost inevitably any contractor working through an agency will return an answer of High Risk

It is important to stress this is an HMRC risk assessment test and while we would not wish to suggest it is biased in favour of HMRC any published information is obviously not going to favour the contractor. A low score is most certainly not determinative that IR35 applies. The guidance does not follow the many Court decisions on IR35 or Employment Law which are the legal authorities for determining whether IR35 is applicable.

There is no reason to panic although equally it would be unwise to ignore as forearmed is forewarned. There is very rarely a clear cut answer on the applicability of IR35 which is why since its introduction in 1999 the interpretation is swayed by Court and Tribunal decisions and these are not changed by this published guidance.

So what actions can we take?

As a fall back measure we would most definitely advise having insurance to defend an IR35 status enquiry either through the PCG or the link on the CTS website http://ctslimited.qdosconsulting.com (Tax liability cover)

There are many areas in which the tests can be criticised but if you can amend your working practices to fall more in line with the principles they highlight this can only be beneficial. Perhaps some people could join forces with a colleague and actually work on a substitution basis. Or perhaps your company could form an LLP with a colleague or colleagues to jointly provide services (perhaps not appropriate to a standard agency situation).

The tax and NI cost of IR35 is significant for a contractor and therefore for the future we may see more collaboration in contracts (two or more workers contracted under the same contract so there is no personal provision of services, an important factor in employment law, hence IR35). Or we may see a trend towards engagements for specific assignments with fixed price contracts or payment by milestones.

The actual guidance which includes some examples is at:- http://www.hmrc.gov.uk/ir35/guidance.pdf