IR35 detailed comment

Introduction

The Question

The question is whether or not a particular contract is a 'relevant engagement' within the meaning of Schedule 12, Finance Act 2000 (otherwise known as the Service Companies Legislation - IR35).  If so, then (assuming all other conditions laid down in that Schedule apply) the Consultant Company should treat the income from it contract as subject to IR35, and account for tax accordingly. 

Disclaimers

Experts agree that there remains uncertainty as to exactly how the courts will apply the IR35 legislation, as cases gradually work their way through the Courts.  They also tend to agree that the Revenue's own interpretation of the law as expressed in their own guidelines and manuals appears biased more towards employment that is consistent with case law.  Despite this uncertainty, it is the Contractor's responsibility to account for his / her tax liabilities accurately, correctly, and in accordance with the law, where a contract is within the scope of the legislation. 

As of March 2003, there have been 4 decided cases under the new legislation (3 by Special Commissioners – Battersby, FS Consulting, and Lime - and one (Synaptek) on appeal to the High Court following a General Commissioners’ decision)- although the PCG Judicial Review case has helped to clarify some angles  [1].  New decided cases may certainly be expected to further clarify the legal position.  They may also change the relative emphasis and importance of the various factors to be considered.  This opinion must therefore be considered against a background of such uncertainty. 

In the case of Lee Ting Sang, it was said, when considering the question of whether or not the employment relationship existed:

'There will be many borderline cases in which similarly instructed minds will come to different conclusions'   [2]

It therefore follows that neither I nor Egos Ltd is able to guarantee either that the Revenue will agree with the opinions expressed on these pages, nor that (if the matter were to come before a Court), a Court would agree.  We cannot accept responsibility for the consequences if you fail to account for your tax liabilities accurately - whether you pay more, or less than you are ultimately liable for - and even if you have relied on this advice in taking your decisions.

You have the opportunity for certainty by applying for a Revenue opinion on the IR35 status of your contract.  If you wish for certainty in ensuring that you do not underpay what is due, then you should apply for such an opinion;  the Revenue will regard their own opinion as binding on them, unless undeclared material facts subsequently emerge.

The Obligation

In outline, the contractor company is obliged to make a returns of the tax and NI payable under the 'deemed payment' calculation as follows:

·         by 19^th April - pay the tax and NI

·         by 19^th May - submit a P35 return

Failure to do so correctly may result in liability for interest - and also, if the Revenue think the failure was caused by 'fraud or neglect', for penalties, which can amount to a further 100% of the tax.  Details are set out in the Revenue's leaflet IR175.  [3]

For the current year only, the Revenue have set down a procedure which allows for the calculations to be submitted by 19^th May on a provisional basis - provided you comply with various conditions, including

o        stating in a covering letter that the IR35 legislation applies, and that the amount is provisional, pending finalization of the calculation

o        the corrections and any adjustment in payment are made by 31^st January 2002.

The Revenue have said that Contractors who follow this procedure will not be charged penalties on any errors - although they will still be liable for interest on sums due but not paid until after 19^th April.[4]

The Contractor must therefore make a commitment by 19^th May at the latest to his/her position in relation to the contract income - and either accept that IR35 does apply to it, or stand by a position that it does not.

In the PCG Judicial Review case it was said:

'I do not consider therefore that to subject service contractors to the common law of employment interferes with their human rights, whether taken together with the additional expense discussed above or on its own: and insofar as the uncertainty may put the service contractor at risk of a wrong decision with regard to self assessment, by way of reassurance Dr Plender QC has, on instructions from the Revenue, referred to two documents:

i)  An Inland Revenue penalty statement, issued on 13 March 2001, reads as follows: "Penalties may also be sought for an incorrect return ... An employer might fail to meet its obligations to file a correct return because of a genuine misunderstanding about the rules caused by their newness. This would be taken into account, along with the effort made by the employer to establish whether a contract is subject to the new rules, when considering penalties".

ii) When I raised with Dr Plender QC the fact that there may be continuing unsureness about whether a particular engagement is covered by IR35, quite apart from the "newness" of the rules, Dr Plender QC referred to the leaflet IR109, which expressly records "if you have taken all reasonable care, we do not seek penalties".  [5]

The Options

If of the view that IR35 does not apply to ANY contract income during the year in question, then the Company's usual year-end P35 should NOT state that the IR35 legislation applies.

In case of uncertainty, the following options are available:

·         where there are at least reasonable grounds for saying that IR35 does not apply, adopt that position, and be prepared to defend it accordingly in case of investigation.  If ultimately unsuccessful, tax will have to be paid, and interest.  Penalties may be mitigated by showing 'genuine misunderstanding' about the rules, and that 'effort' has been made to 'establish whether a contract is subject to the new rules'.  Seeking advice (as has been sought here) may well help considerably to show that such 'effort' has been made.

·         apply for an opinion from the Revenue themselves - this will be regarded by the Revenue as binding on them.  However, it may take some persistence to persuade them to agree - be prepared for an initial logically deficient claim that the contract is within IR35, even in an apparently clear-cut case, and then be prepared to argue the point.  Expect however that the Revenue are likely to resolve any grey areas in their own favour, which may result in the necessity for appeal.

·         be prepared to allow the Revenue the benefit of the doubt, and account for tax under IR35, for the sake of certainty.

·         a fourth possibility may be to take less dividends and more salary than one might otherwise have chosen to do if there were no reasonable prospect of the Revenue disputing IR35 status - this would probably (1) reduce the likelihood of the Revenue entering into serious argument in the first place (because they would expect to get less out of it, were they to win), and (2) if a battle were to be fought and ultimately lost by the Company, these steps would at least have reduced any further tax, interest, and any penalties to a more manageable level.

[mail to Egos]         [Return to Index]          [next]   [Egos w'Welcome' page]

If you're another lawyer or an accountant reading these pages, I'd be happy to discuss any points arising with you - particularly if you'd like to debate any points where you disagree with my views - mail me!

This page was last updated on 31^st March 2003.

No liability is accepted for any inaccuracy in the information in these pages - see full disclaimer

© Egos Ltd - `2001 – 2003 - All rights reserved - see full copyright details

Disclaimer of liability:

The information on these pages is provided free and for information only, and is provided 'as is'. Whilst believed to be correct, it is in no way comprehensive. It is provided for your interest only and is not intended to be relied on as formal legal advice. The posting of information on these pages is not intended to create a lawyer-client relationship, and you should not act or rely on this information without seeking professional advice. No liability is accepted therefore for any errors, or for any losses that may be incurred if it is relied on.

[Return to Top]

Copyright details:

You may read these pages on-line, and download them to read later, for your own personal use.
This copyright notice must appear on every page that you print from here.
You must not redistribute these pages or any part of them in any form or medium without first obtaining my consent.
You are welcome to set up links to this website from others.

[Return to Top]

[Return to 'Welcome' page]