In the light of HMRC’s recent updated and ‘clarified’ advice on IR35, Abbey Tax, a leading authority on IR35 cases, has also provided some key tips for contractors. We summarise them in this article as follows:
There is absolutely no legal reason why a personal service company director should not receive a minimal salary and the rest of his or her income in dividends. However, it is possible that this raises HMRC’s risk assessment, if the company were to come to their attention. So, making sure the correct processes are followed in relation to dividend payments is important, including formally declaring dividends, producing dividend vouchers and making specific discrete payments for the amounts declared.
If it is possible, a signed letter between the contractor and end client, clearly establishing the nature of the engagement, the intended working practices and confirming that the contractor is independent and providing services, can be very useful in stopping and enquiry in its tracks.
Keeping records to establish yourself as a genuine independent contractor, assuming the risks associated with a business, can be a useful tool to combat an incorrect perception. Records worth keeping include those of contract negotiations (successful or otherwise), any potential substitutes that could be considered, insurance certificates, and details of matters which show financial risk, such as contracts which were terminated prematurely, periods without work and financial losses that have been made (e.g. on fixed price work) or times where it has been necessary to undertake remedial work to ensure a project stays on track or additional hours that were not charged for.
Mileage logs and records of expense payments, as well as being needed to prove business expenses claimed, may help prove that the contractor had control over the ‘when’ and the ‘where’ work was done, because they evidence that work was not always undertaken on-site.
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. Also consider tax loss insurance.
Ignore the infamous Business Entity Test. All this does is indicate the risk of a potential enquiry, if the contractor or PSC comes under 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.
An enquiry starts by the issuing of a ‘Check of Employer’s records’ letter – a generic letter asking for details of income in a given year, copies of contracts and what consideration you have given to IR35. A robust and comprehensive response to this letter is important.
HMRC may request a meeting with the contractor, which it is recommended is politely declined, so that all correspondence is undertaken in writing to provide an concrete audit trail.
Once HMRC has enough information and issues a ruling, the contractor can appeal direct to the First-Tier Tribunal, or initially to HMRC’s Appeal and Review Unit.