IR35 Factors, IR35 Compliance, are you caught?

Kate Cottrell from Bauer & Cottrell provides her view on the recent calls for IR35 to be repealed.

In response to all the current press coverage regarding calls for IR35 to be abolished, I would like to add my view as an interested party!

We undertake hundreds of IR35 contract reviews each and every week. We review not just the contract, but most importantly - the working practices. We also work on the technical cases defending contractors.

So, 10 years on, is IR35 unworkable, unfair, or a lottery? Is it stifling hoards of entrepreneurs and threatening the flexibility of the British workforce?

Bad IR35 advice

If you genuinely want to know if a particular engagement is caught by IR35, it is not difficult. Difficulties do arise if you just look at a written contract.

Despite all the case law concerned with IR35 (most of which has found in favour of HMRC), there are still advisors out there claiming that a substitution clause is a 'silver bullet'. This is fundamentally incorrect in an IR35 case unless you have actually sent a substitute.

It is the control issue that is paramount.

Working practices are key

The working practices of contractors are absolutely essential in deciding IR35 status.

We have seen numerous cases where we have an IR35 "friendly" or an IR35 "approved" contract, but the working practices show that we are actually dealing with a temporary worker often standing in the shoes of a permanent employee and subject to the same controls.

Genuine entrepreneurs?

Taking account of all the contractors who have no choice but to operate through a limited company and all those that choose to start contracting perhaps for the lifestyle, higher earnings or the expenses, it would be very interesting to establish the numbers that started out as genuine entrepreneurs.

Yes, undoubtedly, there are some who have intended or gone on to build thriving businesses but it is fair to say that in many of the cases we see this is far from the reality.

New penalty regime

IR35 is only perceived as unfair or a lottery because of the resources deployed on compliance by HMRC. There are many thousands of contractors out there quietly complying with IR35. There are also thousands out there burying their heads in the sand.

No doubt HMRC can now establish the numbers with the new questions on tax returns. The new penalty regime ensures that IR35 now has to be considered for each and every contract by all affected.

Managed Service Companies

We have seen calls for the abolition of IR35 since it started. We have seen the birth of Managed Service Companies (MSC) many of which ignored IR35 and many of which wished for a level playing field. They saw their wishes granted - no more IR35 - but I bet none wished for the transfer of debt legislation!

We now have old MSC's transformed into accountancy service providers and IR35 is still a problem to them, not least because of the transfer of debt rules.

Umbrella companies

We also have the umbrella companies and, again, no more IR35 problems for them.

They too have wished for a level playing field to show they are "HMRC compliant" and have now got the reminder from HMRC that their dispensations can be withdrawn retrospectively and (ahead of the budget) advisory scale rates for some expenses which will become binding on all.

Something worse than IR35?

Experience shows that where IR35 has been removed, something additional (and in some cases far more onerous and costly) is put in its place.

Ahead of the 2009 Budget and in light of the state of the global economy and current government finances, does anyone think that IR35 will be abolished without being replaced by a system that will generate far more tax and NIC from contractors?

All I would say is please be careful what you wish for!

Kate Cottrell