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IR35 may be repealed or replaced, but the old rules will apply to previous contracts

Contractors anticipating the demise of IR35, as a consequence of the IR35 review being conducted by the Office of Tax Simplification, must still keep their IR35 house in order, as whatever happens in future contracts worked on until any new legislation comes into force must still conform to current legislation.

Andy Vessey of Qdos Consulting says: “IR35 does not only still apply to contractor contracts, but will also remain in force until formally repealed. And even then, it will continue to apply to contracts completed in all the years since it came into force.”

The IR35 specialist adds that nothing has changed yet and so is still very much business as usual when it comes to IR35. In other words, contractors must continue to manage their tax affairs with due care, commissioning IR35 contract reviews and keeping rigorous hard copy and electronic files of each contract and its related ‘paperwork’.

IR35 ‘retrospective tax legislation’

Vessey is keen to clarify the current situation and put it in its historical context. “Much has been made in the contracting community about unfair retrospective tax legislation being imposed by the previous administration,” continues Vessey. “These are labelled as attacks on contractors and their lifestyles, but this is not necessarily the case.”

He says the settlements legislation, S624 ITTOIA 2005, formerly known as Section 660, dates back to the 1920s and has simply been resurrected. Similarly, the furore over BN66 was not an attempt by the taxman to backdate taxes unfairly – it was simple clarification of tax legislation relating to offshore solutions that sought to exploit loopholes in the legislation.

“If repealed, IR35 will be no more a retrospective tax than, for example, capital allowances,” says Vessey. “The fact that legislation applies to contracts during the period it was in force is simply maintaining a stable tax regime.”

Contractors – a ‘target-rich environment’ for HMRC

The concern of taxation experts like Vessey is that, no matter which government is in power, it will need ever greater tax yields to pay for the public sector deficit.

“Tax legislation is generally enforced according to HMRC’s inclination and resources,” warns Vessey, “and with ever increasing target yields, this may well mean HMRC will make use of IR35 and the six-year window of tax records to target higher earning contractors.”

That means there should be even greater motivation for contractors to put their IR35 house in order as soon as possible.

Can HMRC target dissolved companies?

Even if contractors’ limited companies are dissolved, that does not mean they can’t come under IR35 investigation. Vessey explains that HMRC has a three-month window to object to the dissolution of a contractor limited company.

“If HMRC fails to object, then it’s pretty much lost its chance,” says Vessey. “There are only a couple of instances when HMRC can go after a company director personally, and that’s if the directors have wilfully failed to deduct tax and national insurance contributions.” However, he says that in the past, the taxman has been on the ball at spotting contractors trying to wriggle out of an investigation by winding up their company.

But for most contractors, there is still plenty of time for HMRC to schedule an IR35 investigation. Vessey concludes: “Not only can contractors be hit for large back taxes, interest and penalties if found inside IR35, but they can also be penalised for failing to take due care over their tax affairs. This can go on for six years after IR35 is repealed – if, in fact it is.”

Updated: 28 February 2012

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