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The £99,000 IR35 case!

It is an eight-year-old story and a landmark case in the history of IR35 but its consequences still rattle the cages of contractors across the UK today. Since that fateful day in September 2008, when a High Court ruling resulted in Dragonfly Consultancy Limited being issued with a £99,000 tax and NI bill, even more people have embarked on a contractor career. So, for their benefit (and that of those with short memories), here are the facts once more:

What is IR35?

The Intermediaries Legislation was first introduced during Chancellor Gordon Brown’s March 1999 budget; the resulting press release issued by the then Inland Revenue (IR) was number 35, hence the name IR35. The term stuck and it has been referred to as such ever since. The purpose of the ruling was to stop contractors, consultants and freelancers from avoiding tax and National Insurance contributions by trading as limited companies. The idea being that an employee doing the same work (paid through PAYE) would pay more tax and NI.

The law aims to stop the few who are trying to cheat the system but not without cost or a headache to the many legitimate contractors working in the UK. The result is a legal minefield for people who have set up a tax efficient limited company as a way of providing a service for their customers. Here, in a nutshell, are the main points that you need to know to stay on the right side of the ruling.

Avoiding getting caught in the IR35 net…

If IR35 is found to apply to any of your contracts, you are required to apply different rules to your company’s income. You may be liable for additional PAYE and NI payments under the rules. This is only relevant if you are a contractor or freelancer providing services for a customer through a limited company.

There is an essential distinction to be made between a contract for services and a contract of service, the latter being an employment contract to which IR35 would apply. Three key points to look at to determine which type of contract you have are:

1. Personal Service:

Your contract with your customer should not stipulate that ‘only you’ can do the work. The best way to demonstrate this is a reasonably unfettered right for your company to send a substitute.

2. Control:

Your limited company should have the absolute and unfettered right of control over how the work is carried out. The methods of working should be your own and not stipulated by your customer. The alternative scenario would put you in IR35 catchment territory.

3. Mutuality of Obligation (MOO):

In your contract there must not be an obligation for you as the contractor to accept work and for your client to provide you with work. The clearest way to demonstrate this in a contract is to have an immediate termination clause for either party. This is not the only way to demonstrate a lack of MOO but it is certainly the clearest for all parties.

Who decides if IR35 applies to your contract?

HMRC can trigger an investigation at any time. HMRC can, if they choose to, look back at your historical contracts too. An investigation could follow and the outcome of that investigation will determine if you are liable to pay additional tax and National Insurance.

It is essential that every contract you enter into is reviewed in order to establish its IR35 status.

IR35 is a complex subject and there is no substitute for professional advice. Contract reviews are a free service we provide for all our contractor clients. If you would like advice and guidance from the experts, call our team today.