Not an awful lot has been heard since the much-vaunted House of Lords review, earlier this year, of the tax regime surrounding the self-employed and freelance community in the UK. Meanwhile, the number of self-employed workers in the UK was recently reported to have grown to 4.58 million by the Office of National Statistics.
Labour Party Focus
Perhaps surprisingly, the Labour Party was the clearest of the three main parties in focussing specific attention on the self-employed community during the recently-ended conference season, which perhaps has more resonance than usual, given the proximity of an election and the neck-and-neck nature of the polls.
Labour speakers, including Ed Milliband, and pre-conference briefings suggested they were in favour of actively promoting a specific framework of policy to support the self-employed, potentially under the auspices of a designated minister and even floated the idea of a new form of template company structure, designed for freelance contractors. This would be specifically designed for use by such businesses, for example with provision for one shareholder and one source of contract-driven income and presumably with a set of clear tax criteria, to reduce the uncertainty and admin burden of IR35, though this was not explored.
Top IR35 Tips
With one of the closest-to-call elections in the offing and the Conservatives back ahead in the polls, who knows whether the above will ever see the light of day! Hopefully it will stimulate debate at any rate.
In the meantime, a reminder of a few points on IR35:
Contracts and Documents
- Make sure your contract, working practices and other correspondence with your client all consistently justify at least one of the three key tests to establish a non-employment relationship
- Consider having your contract and working practices reviewed by an expert, which may put your mind at rest and will also demonstrate that you have gone to appropriate lengths to consider IR35, something HMRC will look for in an investigation or enquiry
- Make sure salary and dividend payments are separate and clearly evidenced, with payslips and dividend vouchers
- Watch out for expenses – making sure only those that are genuinely and legitimately incurred for business reasons are claimed is becoming more important with instances of this coming within HMRC’s sights seemingly on the up
HMRC Correspondence and Enquiry
- If you receive any type of letter, regardless of what it seems to be about, if it mentions IR35 you have to assume it could be the start of an enquiry and you should get expert advice to deal with it.
- Put everything in writing – make sure you provide a robust response and evidence in writing; don’t rely on emails, telephone conversations or face-to-face meetings – HMRC can’t force anyone to meet in person and you have a better chance of evidencing everything in a calm and logical way if you have time to prepare a proper written response to their questions.
- Ignore the infamous ‘Business Entity Test’. All this does is indicate the risk of a potential enquiry if the contractor or PSC comes under the HMRC radar and is, in our opinion, skewed to make this appear likely in nearly every case. It does not, though, in any way establish whether the engagement is actually caught by IR35, nor does it hold any relevance in establishing the status in an investigation, tribunal or a court.
- Generally, even if HMRC believe you to be caught by IR35, they can’t recover ‘underpaid’ PAYE from the director him/herself, even where there is no money in the company to meet the liability. According to regulations, HMRC can only recover tax in such a way where the employer made reasonable attempts to deduct PAYE and an error was made in good faith on its part, or the employee received payments knowing the employer had wilfully failed to deduct the right amounts. Due to the greyness of IR35 legislation, neither of these conditions will have been fulfilled by a contractor who has in good faith considered the IR35 rules and concluded he/she is outside of them and then acted accordingly.
- Consider obtaining business insurance if you don’t already need it and creating company stationery, such as business cards. These help to prove your status as providing services and genuinely in business on your own account.
- Keep a record of all the things that might indicate a genuine business relationship – documents that evidence your control over the services you provide, instances where you‘ve used a substitute, instances where contracts have overlapped and you’ve worked for two or more clients simultaneously, early contract terminations, or where you’ve had to carry our work for free to make up time or improve and outcome.
- Particularly on a long contract, you could even arrange for a substitute to come in for a very short time, even if just for one day and even if they work on the project at their own premises (but with the knowledge of the client), for example to keep the project on track if you have a day off.
- The ultimate protection is purchasing tax loss insurance (as opposed to tax investigation insurance)