IR35 detailed comment

Obligation, Options, and other online reference

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. [1]

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

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

· 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.[2]

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.

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.

Online reference materials

The Inland Revenue Guidelines published February 2000, setting out the Revenue's views on the interpretation of the law relating to IR35 can be found at can be found at http://www.inlandrevenue.gov.uk/ir35/guidance.htm

The parts of the Inland Revenue Employment status manual, which sets out more details on the Revenue's interpretation of the law relating to the boundaries between employed and self-employed status can be found at
http://www.inlandrevenue.gov.uk/manuals/esmmanual/part1000/esm1000.htm; the parts dealing with other aspects of IR35 (eg calculation of tax) can be found at http://www.inlandrevenue.gov.uk/manuals/esmmanual/part3000/esm3000.htm

The Revenue's leaflet on how to make the 'deemed payment' calculation can be found at http://www.inlandrevenue.gov.uk/ir35/deemedpay.htm

The relevant schedule of the Finance Act 2000 (Schedule 12) can be found at http://www.legislation.hmso.gov.uk/acts/acts2000/00017-av.htm#sch12

The Revenue's position on penalties for incorrect returns in relation to IR35 can be found at http://www.inlandrevenue.gov.uk/ir35/penalty.htm

The Revenue procedures for dealing with a 'compliance review' are at http://www.inlandrevenue.gov.uk/pdfs/ir109.htm

The Revenue's IR35 website is at http://www.inlandrevenue.gov.uk/ir35/ .

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This page was last updated on 3^rd March 2001.

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