Gone
are the days when at the end of the tax year, all the contractor had to do was
the simple end of year 'P35' PAYE return, just dealing with salary actually
paid - and (s)he could leave everything else until the company accounts for the
year were concluded.
Now,
where during the tax year a contractor has had income from a contract falling
within IR35, the IR35 tax and NI must be paid by 19th April, and
full details must be included within this P35 return - which is due by 19th
May. Details are set out in the
Revenue's leaflet IR175 - http://www.inlandrevenue.gov.uk/ir35/deemedpay.htm. Fail to do this right, and you could be
letting yourself in for interest - and also, if the think your failure to do so
was caused by your 'fraud or neglect', for penalties - significantly more
expensive.
In
relation to the income from each contract during that tax year, it is your
responsibility to form a view on its IR35 status - one which, if not correct,
is at least supported by existing case law.
You have to do this as a preliminary, before you can make the
correct return and payment.
For
this year only, the Revenue have set down a procedure which allows for the
calculations to be submitted by 19th May on a provisional basis -
provided you comply with various conditions, including
1
stating
in a covering letter that the IR35 legislation applies, and that the amount is
provisional, pending finalization of the calculation
2
the
corrections and any adjustment in payment are made by 31st January
2002.
Follow
this procedure, and you will not be charged penalties on any errors - though
you will still be liable for interest on sums due but not paid until after 19th
April. Details are at http://www.inlandrevenue.gov.uk/ir35/penalty.htm.
Whilst
this may help by giving a little longer for the various necessary components of
the arithmetic to be assembled, it does not help at all on the basic
issue of declaring whether or not IR35 applies in the first place. -
that is a decision to which you have to be prepared to make a commitment - you
have to state whether the 'service companies legislation' applies to your
company, or not. If you have some
income during the year which was within IR35, then it applies - and if you did
not, then it does not. Just
because your company may be a service company does not mean that the
legislation applies. If you
declare that the 'service companies legislation' applies to your company, then
you are saying 'yes we have income within IR35'. The concession allowing for a provisional return to be submitted does
not extend to allowing for delaying answering the fundamental question
of whether IR35 actually applies to any of your contract income
during the tax year.
You
have to ask this question separately in relation to each such contract - it is
perfectly possible to have income from one contract which is outside IR35, and
from another which is within.
It
follows from that that where you have income from one contract which you accept
as being inside IR35, you may complete the forms stating that the 'service
companies legislation' applies to your company (because it does, at least in
relation to that contract) - and you may then be able to take advantage of the
provisional payment procedure for this year - and have more time to assess the
IR35 status of the other contracts, without the risk of penalties.
Where
you think IR35 may not apply to any of your contracts however, you
have to be confident of your position in relation to them all -
you cannot state that the 'service companies legislation' applies to your
company, because if none of your contracts is within IR35, then that
legislation does not apply.
You cannot take advantage of the provisional procedure to delay taking
these decisions.
Some
contracts are clearly outside IR35, and others clearly within. But a large proportion nowadays fall into a
grey area in the middle, where it is obvious neither one way nor the other, and
the decision is one that needs to be taken after full consideration of all the
facts and all the underlying legal issues.
Within
this grey area, if you take the decision and get it wrong:
1
if
you wrongly decide that the contract is within IR35, you commit to paying
significantly more tax and NI
2
if
you wrongly decide that the contract is outside IR35, you will be charged
interest, and risk penalties if the Revenue take the view that you got it wrong
through 'fraud or neglect'. To reduce
this risk, one of the things the Revenue will take into account is 'the effort
(you) made to establish whether a
contract is subject' to IR35.
You
may seek the Revenue's own opinion on the contract, but current experience
continues to show that such opinions tend very much to be biased towards
seeking points that may indicate towards 'within IR35' status, and ignoring
other pointers - in many cases, the reasoning the Revenue give in their
opinions is inconsistent with the law - maybe a result partly of misunderstanding
on the part of the individuals dealing with such matters, and partly of
inaccuracy and omission in the Revenue's own internal guidelines and
manuals. Where the contract falls into
the grey area, expect an initial 'inside IR35' opinion, and then to have to
argue your case.
Otherwise,
the only real alternative for the contractor who wants to show that (s)he has
made proper efforts to establish whether or not the contract is within IR35 is
to seek - and follow - appropriate
professional advice.
I
suspect that I and many other advisors specializing in this field are likely to
be very busy during the lead up to 19th April, as the importance of
this 19th April deadline dawns on more and more contractors . I know that The PCG (http://www.pcgroup.org.uk - of which, in
my opinion, all contractors should be members) is about to launch a web-based
contract review service, both to assist members in selecting a suitable advisor
and obtaining such advice, and to build a knowledge base from incognito
data, from which suitable cases for appeal may be selected.
Whichever
route you choose, you have to take the decision - and the responsibility for it
- very soon. The deadline is looming.
23rd
February 2001
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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