Taxation

IR35
Getting it wrong can be costly!


	What you need to consider if you fall within the scope of 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 cam amount to many thousand of pounds, 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 engagement. Such records will ensure you don't miss any opportunity to claim the deductions against the relevant taxable income where IR35 does apply. For those that conclude their enagagements are outside the scope of IR35, you may need to defend that decision when you receive a tax compliance visit from HM Revenue & Customs. If the Revenue decide your contracts do fall within the scope of IR35 and you have not complied with the regulations then your company is going to face some painful back-duty tax assessments. This will invariable spill over to adversly affect your personal financial position. Although the new 19% Corporation tax charge on dividends to non-corporate shareholders will mitigate the final tax adjustment payment you may face, we suggest you spend a few minutes reading through an example of the how IR35 can require a significant charge to tax on a modest consultancy income of £60,000 per year. You may then appreciate why it is so important to attempt to correctly identify if each and every contract you enter into falls inside or outside the IR35 regulations. We write 'try' because employment status is a very hard to determine at the best of times. The matter is also complicated by the fact the Revenue themselves seem very inconsistent at the grass root level in the way their inspectors apply the regulations in practice. The final problem is that so many contractors are probably incorrectly not comply with IR35 on the flimsy grounds that they are working to a so called IR35-safe contract. We will be pleased to talk through the finer points of IR35, but for the moment all you need do is review the engagements you have worked on since the 6th April 2001, and then 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 during the period 6 April 2000 to 5 April 2005. This is the period up to the current fiscal year that is relevant to IR35. 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 2005/2006 fiscal tax year, and the IR35 tax assessment will be based on the relevant income received in the period 6 April 2005 to 5 April 2006. Any IR35 tax that may arise in respect of the fiscal year 2005/2006 will crystalise on the 5 April 2006. Any tax that does arise will fall due for payment on or before 19 April 2006. There are a few beneficial tax-planning measures you can take advantage of, but these must be carried out before 5 April 2006. The fact that the charge to IR35 tax may arise on the 5 April and that the settlement must be made by the 19 April each year leaves precious little time for us to advise you of all you need in the two week window. It is therefore essential for you to present the required information we set out below to us no later than mid-March 2006. This will allow us sufficient time to advise you on any tax planning options you may exercise to reduce the impact of IR35 before the 5 April 2006. After this date, we will be better placed to quickly calculate the final liability to tax, so that you can pay it on time by the 19 April 2006, and avoid late payment interest and possible penalties. 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 describe in a few paragraphs how the contract was won by, and awarded to, your intermediary company. You need to record full names and addresses of the client and any intermediary agencies involved in the running of the contract, together with the start and finishing dates of the contract. Section 2 - The Contract. Include copies of any relevant contract, including changes to extend the terms of the contract. To be valid, the contract must be signed by both parties. Section 3 - Sales. Include copies of all the sales invoices raised against the contract, and record the exact date you received the payment. Remember, it is the amount that is received between 6 April 2005 and 5 April 2006 that is assessed to IR35 tax for 2005/2006. Even if a contract ended last year well before the 5 April 2005, any related income that is received after the 5 April 2005 will be assessed in 2005/2006 for IR35 purposes. Section 4 - Expenses reimbursed to you by your company. Keep detailed records of any expenditure you incur is respect of the performance of this contract. This should especially include detailed daily business mileage records, overnight costs and subsistence, as well as any travel costs. 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, is going to be assessed as taxable income. This includes benefits such as the provision of temporary accommodation, vehicles, and corporate entertainment, or daily 'living allowances'. This would include details of any payments made by the client to any third parties on your, or your company's behalf (such as hotel or travel costs paid directly by the client). The Inland Revenue are aware that the kind of taxpayer IR35 applies to are, by virtue of their position, very likely to enjoy such benefits. 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 on, is the amount of pension contributions your company makes to a recognised pension fund on your behalf during the period 6 April 2005 to 5 April 2006. This is an allowable expense against the total income assessable to IR35.
	Section B What you would be well advised to keep if you undertake consultancy work through an intermediary, and you don't treat the income as relevant to IR35. Back to top			If you undertake long-term consultancy work, and you, your company, or your partnership receive gross payments from the client, then you are already into a danger area that will attract the close scrutiny of the Inland Revenue. If you are a sole-trader, then there are tax-avoidance provisions under the IR35 regulations for just this very scenario. In practice the nature of your engagement is going to be more of a question of whether you should be reclassified as a direct employee of the client. If you find yourself in this position please seek our professional advice immediately. For a company or partnership, the purpose of the next section is too highlight the information you should make available to the Revenue if they challenge your employment status in respect of IR35 regulations. As the published target for making tax compliance visits is once every three year, you will appreciate that a business engaged in IR35-type work is more likely to receive the Revenue's attention than one that does not. As far as the Revenue are concerned, you will be a high earner and if you have incorrectly failed to comply with IR35 the potentially for recovery of a large amount of tax justifies their investigation costs. The first point we make is to remind you that in borderline cases, where there is doubt as to whether the engagement falls within the scope of IR35, you should consider submitting the details to 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 provide some security that the tax treatment of the relevant income is correct. The second point is that each contract has to be considered for IR35 individually. The fact that you may be simultaneously working on six major contracts that legitmately fall outside the scope of IR35, doesn't mean that the seventh minor contract will automatically do so as well. It is the nature of each engagement viewed in isolation that determines if the regulations apply. We now recommend a list of the documents and information you should record and retain for at least three years from the end of every tax year (April 5). You should do so for every engagement you treat as outside the scope of IR35: Details of how you found the engagement, together with any adverts for the work in question. The start and end dates of the engagement. The client's business name, address and a contact name within that organisation. 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. 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.