Taxation

IR35
What you need to do, to help yourself


	Why you need to take care if you fall within the scope of IR35. Even more so, if you think you are just outside IR35. IR35 explained Is it worth the risk?			This infosheet is intended to provide guidance to anyone affected by the IR35 regulations. The information given below will also be relevant to those that believe that their working arrangements remain just outside the scope of IR35. An IR35 back-duty assessment will hurt, so make sure you give the taxation issues involved the serious attention it deserves. We have divided this page into two sections: Section A - For those that accept that IR35 applies to their engagement. Section B - For those that intend to claim that IR35 does not apply. If you offer your personal services through your own personal service company or partnership, then you must keep accurate and detailed records of each and every engagement. Doing so will ensure you don't miss an opportunity to claim all of the allowable deductions against taxable income where IR35 does apply. Where you consider an engagement falls outside the scope of IR35, you may need to defend that decision later when you receive a tax compliance visit from the Inland Revenue. You will have a tough time if you haven't kept a detailed set of records to support your arguments. If the Inland Revenue don't reach the same conclusion as you, then you are going to face a sizable back-duty tax assessment. We suggest you spend a few minutes reading through an example of the way tax is assessed to IR35 on a modest income of just £60,000 per year. You may then realise why it is so important to give this matter your full consideration to make sure you get it right first time around. What we are suggesting below will not win us popularity votes. But if it saves you paying very large amounts of tax, late payment interest and penalties later on, you may just consider the effort worthwhile. You first need to review all of the consultancy engagements you have worked on since the 6th April 2001, and decide whether they are relevant to IR35, or not. If any of your contracts are within the scope of IR35, read Section A. If you decide that they remain outside the scope of IR35, read Section B. Hopefully you have already dealt correctly with any contract income received from 6 April 2000 when IR35 first applied through to 5 April 2003. If you have any reason to doubt the correct treatment of any income during this period, then we will be pleased to discuss the matter with you at your convenience. It is wiser for you to deal with the issue sooner, rather than later.
	Section A The minimum information you should store on file for each IR35-relevant engagement Back to top			This section sets out the minimum information you should collect together and file, for each and every separate engagement you intend to declare as being relevant to IR35. We are currently in the 2002/2003 fiscal tax year, and the current IR35 tax assessment period will be run from 6 April 2002 to 5 April 2003. The final charge to 2002/2003 IR35 tax is determined on the 5 April 2003. Any IR35 tax that may arise must be paid by the 19 April 2003 - just 14 days later. Forward planning and timing is critical as far as IR35 tax planning is concerned. There are precious few beneficial tax-planning measures you can take advantage of, and these must be carried out before 5 April 2003. You will readily appreciate that the time frame for organising, finalising and paying any relevant tax is very short indeed. It is essential that you pull together all the requested information if you are to make the various April deadlines in time. What you need to do. We suggest you use a separate file for each IR35-relevant engagement, and then divide the file up into the following sections, using card dividers: Section 1 - A resume of the engagement. You should briefly describe over a few paragraphs how the contract was won and awarded to your company or partnership. You need to record full names of any contacts within the client and any agencies involved. Section 2 - The Contract. Include copies of any relevant contracts, including written amendments to vary the terms. e.g. extensions. Make sure you retain a signed copy and not a draft. Where you have contracted through an agency, request a copy of the contract the agency has with the client. You may find the agency will be reluctant to provide you with a copy, but the client may be more accommodating. Section 3 - Sales. Include copies of all the sales invoices raised against the contract, and record the exact date you received the income. Remember, it is the amount that is received between 6 April 2002 and 5 April 2003 that is assessed to IR35 tax for 2002/2003. Even if a contract ended well before the 5 April 2003, any related income received after the 5 April 2003 will be assessed in the next tax year 2003/2004. Section 4 - Expenses reimbursed to you by your company. Keep detailed records of any expenditure you incur in respect of the performance of this contract. This should include detailed daily business mileage records for company or private car use, overnight costs and subsistence, as well as any other travel costs (taxi, train, air fares etc). It is essential to retain all receipts if you intend to claim them for tax deduction purposes. Section 5 - Reimbursed expenditure paid by the client. If it is not immediately obvious in the breakdown analysis on each sales invoice, keep detailed records of any expenditure reimbursed by the client to you personally, or to your company. This should include details of any payments made by your client to any third parties on your, or your Company's behalf (such as hotel or travel costs paid directly by the client) Section 6 - Benefits in kind. It is one of those matters that taxpayers are understandably reluctant to accept, but any benefit-in-kind enjoyed by them, or their intermediary, which is paid for by the client, may be assessed as taxable income on the them personally. This includes the provision of temporary accommodation, vehicles, corporate entertainment, or direct payments to workers for daily 'living allowances'. You are obliged to keep accurate and detailed records of any such payments made by the client on your behalf. The Inland Revenue are acutely aware that the kind of taxpayer IR35 may affect may well enjoy certain privileges. They will therefore be looking much more critically at the circumstances that surround a particular engagement to see if they can find any undeclared benefits. The final piece of information you should keep track of is the amount of pension contributions your company makes to a recognised pension fund during the period 6 April 2002 to 5 April 2003. This is an allowable expense against the total income assessable to IR35.
	Section B The documentation and information you need to keep if you undertake consultancy work through an intermediary, and you don't treat the income as relevant to IR35. Back to top			This section sets out the minimum information you should retain for each engagement you intend to claim that IR35 does not apply to. If you undertake long-term consultancy work and you, your company, or your partnership receive gross payments from your client, then you are already into a danger area that will attract the close scrutiny of the Inland Revenue. Although there are provisions for sole-traders under IR35, in practice the real question is whether your engagement should be reclassified as one of direct employment by your client. If you find yourself in this position please seek professional advice immediately. IR35 is much more likely to affect companies or partnerships. The purpose of Section B is to highlight the information you should have to hand if the Inland Revenue challenge your treatment of consultancy income in respect of IR35. The Inland Revenue's published target is to make a tax compliance visit to every business at least once every three years. You will appreciate that if your business is engaged in typical IR35-type work (IT or engineering consultancy for example) you can expect a visit over the next few years. The first point to make, is that it is relatively easy to identify those engagements where IR35 definitely applies or doesn't as the case may be. These are not the issue here. It is the borderline cases where the decision could go either way that we are really addressing. The best defense against borderline cases, is to assemble the facts, provide documents to support your case and then ask the Inland Revenue for a formal decision. Their decision is not binding on either side, but a confirmation that the engagement is not within the scope of IR35 is certainly going to let you sleep at night. It is also important to understand that each and every engagement has to be evaluated and judged individually. It is possible for someone to be working on two or more similar part-time engagements and find that the tax treatment of each one as far as IR35 is concerned may differ. We mention this because it is human nature to try and take shortcuts. If you take on a number of borderline IR35 engagements and you wish to avoid problems later on, you must diligently collect together the required information we suggest below, for each and every contract. Doing it piecemeal just doesn't work. We next provide a list of documents you should collect together and the kind of information you should record for each engagement. You should keep these records for at least three years from the end of every tax year (April 5) to which they apply: Details of how you found the engagement. The start and end dates of the engagement. The client's business name, address and a suitable contact name within the organisation. You will also need to do the same if the engagement is managed by an agency. The name and contact details of the worker. Copies of any tenders made by the intermediary. A copy of any written contract, job or work specifications. It is important to retain the signed original contracts and not meaningless unsigned drafts. Remember also that even if you cannot obtain a copy of the contract between any agencies involved and your client, the Inland Revenue may still request your agency or client to produce one. Details of any additional contractual terms not included within the written contracts, whether oral, written or implied. A summary of how and who within the client allocates the work, and the role the worker plays in the client's organisation. Did the worker operate alone, or as part of a team? Details of the method of remuneration. Did the intermediary carry any financial risk? A record of the days/hours worked on the engagement. Details of the relevant sales invoices raised by the intermediary to the client, and when they were paid. Details of expenditure incurred by the worker and the intermediary. Were any amounts reimbursed by the client, and to whom were they paid? Details of any assets, accommodation, or vehicles provided by the client for the use of the worker or intermediary. Any further details that contribute to an understanding of how the engagement was conducted, that might influence the decision of whether it falls within the scope of IR35. Do not be tempted into taking the easier option of just retaining a copy of the relevant written contract in the hope that this will be sufficient. The Inland Revenue has already indicated that a contract in isolation will rarely be enough to base a decision upon. It follows that the more evidence you possess to support your point of view, the more likely it is that you will succeed in avoiding IR35.