By living in a ‘state of denial’ over their IR35 status, contractors are placing themselves at great risk of investigation by the taxman. Now is the time to do something about it, particularly with contracting sector specialists warning of an imminent major clampdown by HMRC.
In our survey of readers in October 2008, 79% admitted not having had their current contract reviewed. 79%! So just why do so many contractors choose not to have their contracts and working arrangements reviewed to determine their IR35 status?
It can’t be the cost, as not only are in-depth contract and working arrangement reviews extremely good value, with many leading suppliers offering them for under £100; and some even include reviews as part of their ongoing service.
So if it’s not the cost, it’s probably a fear among contractors that if they ask a specialist whether their contract is inside IR35, the answer might be ‘yes’. Self denial might be fine when it comes to a Mars bar, but when you’re dealing with your IR35 tax status, it’s a very, very dangerous game, which could have long-term consequences way into the future.
Bear in mind that, if your accountant believes you to be inside IR35 they are now under a legal obligation to ensure you pay taxes accordingly, or to shop you to HMRC. And changes to legislation mean that you must be able to demonstrate your ‘duty of care’ when it comes to paying tax. So, if you haven’t had a review and are found to be within IR35, the full force (and fury) of the taxman will be brought to bear.
All that aside, of course the most important reason to have your contracts reviewed is to protect your income. Because if you are working inside IR35, you can wave goodbye to a substantial proportion of your hard-earned income.
I suppose the fact that there are hundreds of thousands of contractors out there and HMRC investigates only around 1,000 each year, could lead contractors to be blasé. After all, the chances appear very slim that you’ll ever be caught.
But there are strong indications that this is likely to change. HMRC has now done the rounds of the Managed Services Companies and has spent a bit of time having a pop at the umbrella companies. During this time, they might have taken their eye off the IR35 ball. But no longer.
As we previously reported, HMRC has clearly stated it is going after anyone it feels is not paying their fair share of tax, and have an astonishing £1billion budget to do it. Offshore solutions are already in the firing line and limited company contractors will almost certainly be hit hard.
The questions in tax returns can now highlight to HMRC exactly who is working through a personal service company, and so it’s clearly very easy for investigators (or their computer programs) to spot contractors for whom a thorough inspection might get HM Treasury a good return.
Don’t be an IR35 victim. It’s not difficult to mount a credible IR35 defence. The evidence suggests that HMRC lose so many IR35 cases because the contractors are genuine, and that most limited company contractors are clearly not employees and actually work outside of IR35.
There is a very real threat that many innocent contractors may find themselves enduring costly and distressing investigations because they have not taken the basic, and largely inexpensive, steps to establish their IR35 status. Doing so will almost certainly kill an investigation before it starts, or bring it to a relatively swift conclusion in the contractor’s favour.
In addition to having contracts and renewals reviewed, a key element of any defence is ensuring that you have IR35 tax investigation insurance that can pay for expert assistance in the event of an investigation. If the investigation makes it to the tax tribunals, that insurance could save tens of thousands of pounds in professional fees.
The clampdown is coming. Don’t let IR35 denial leave you in the frame.