Tax Investigation - Contractors and IR35  

If you are a contractor, avoid tax investigation by knowing your way around IR35

IR35 is a piece of tax legislation that came into force in April 2000, and is aimed specifically at contractors. The legislation means that contractors can be taxed as employees where they were previously defined as self-employed. Not all contractors will be affected by IR35 but if you are a contractor you should be familiar with it in order to avoid a tax investigation.

Contractors such as engineers and IT consultants can end up paying significantly larger sums of tax if they are caught by IR35 during the course of a tax investigation. Take home pay can be reduced by up to 25%, and undergoing a tax investigation under IR35 can be an expensive mistake costing you thousands.

HMRC defines IR35 as:

"Intermediaries such as service companies can be set up to provide the services of a single worker to a client in circumstances where, if it were not for the service company, the worker would be an employee of the client. The use of service companies in this way allows the client to make payments to the company rather than the individual, without deducting PAYE or NICs

The worker can then take the money out of the service company in the form of dividends instead of salary. Dividends are not liable to NICs so the worker will pay less in NICs than either a conventional employee or a self-employed person.

The Chancellor believes that avoidance of PAYE and NICs in this way needs to be tackled in the interests of fairness."

Will IR35 undertake a tax investigation against me?

Your contract of service or engagement should be specific about the conditions under which you work, and be specific to you. If your contract allows you to work elsewhere at the same time, it is more likely that the Inland Revenue will consider you self-employed. If your contract requires your exclusive services, it is more likely that you will be considered an employee.

You should also avoid clauses that set out the days and hours you must work, and when you should take breaks. A self-employed contractor should be seen to be able to organise his/her own hours of work, and to provide a replacement in the event that he/she is unable to work. These are two factors that will be taken into account during a tax investigation, although as with all things legal, definitions play a part and there is a difference between substitution and sub-contracting.

A contractor receiving the identical remuneration from an employer on a regular basis is more likely to be considered an employee, and if you only use equipment provided by the employer, this can count against you during a tax investigation. A more obvious guideline is that you won't be a member of any management team, and you won't be responsible for any other staff within the organisation.

What if I am deemed to be an employee?

HMRC uses the term 'disguised employee' to describe contractors who might fall into the category of employee under the new rules.

If you are caught by an IR35 tax investigation, it is not only your current contract that may be affected - HMRC has the power to look at up to 6 years worth of accounts to see whether they can recover any further liabilities from you.

HMRC advises that if you are in any doubt about the status of your contract, and therefore your employee/contractor status, you should get professional advice. It could spare you an unpleasant tax investigation and many thousands of pounds in the long run.

If you have received notice from HMRC of a tax investigation or Civil Investigation of Fraud proceedings, call us for help and advice today. All enquiries are strictly confidential, so phone 0800 734 3333 or e-mail scott.gilbert@gilberttax.co.uk now

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