IR35 – Where Are We Now?

IR35 – Where Are We Now?

It’s been one helluva summer at Acumenica Towers trying to keep abreast of all the changes and prepare for April 2020. There’s been a lot of talk, we’ve had meetings with MPs, there’s been questions asked in parliament and there’s been a constant churn of conjecture and speculation from the Rumour Mill.

But the truth is, we don’t know where we are yet. The end clients hold the cards and they’re tight against their chest at the minute. Until they start showing them, we – that’s Acumenica, our clients, and the wider contracting community – must exist in a kind of limbo.

It’s important to remember that the legislation isn’t changing and, at least in theory, someone who can at the moment accurately be deemed an independent contractor should still be able to be a contractor after April 2020. The only change is that the person responsible for determining the status of the contractor is moving from the contractor himself to the engager (end client). The obvious and very real fear is that the big banks and financial institutions will take a risk averse view and deem all contractors inside-IR35. This is what is being known as a “blanket approach” or a “blanket ruling.” So, what we are able to advise depends very much on what position your end client takes:

  • If the client blanket rules everyone inside IR35, then there’s little we can do other than try to mitigate the losses: you can either wind up the company, or continue on an inside basis with all of the tax and none of the benefits of independent contractor status, or you can potentially move to a staff position.
  • If the client indicates that they will be looking at each contractor engagement on a case-by-case basis, then we are in a much better position to influence the outcome. Then it becomes very much a play on how you position yourself. This is where you need to define working practices, terms of engagement, removal of “part and parcel” style arrangements etc.

This is an ever-changing landscape so please, please keep coming back here, the advice tomorrow could be very different from the advice today.

HMRC win first IR35 case in nine years – what lessons can be learned?

HMRC win first IR35 case in nine years – what lessons can be learned?

Our pals at the Revenue have defeated a BBC presenter in the first IR35 ruling since 2011, handing them their first success since 2009. This high profile case involved a BBC news presenter, Christa Ackroyd who operated through a personal service company, Christa Ackroyd Media Ltd (CAM Ltd).

While the First Tier Tribunal (FTT) has confirmed that this ruling will not be a test/lead case, is it does serve as a stark reminder that IR35, for all its flaws, can be effective if HMRC choose to enforce it.

Ackroyd presented the BBC’s Look North show via CAM Ltd. The contract with the BBC was for seven years and Ackroyd was required to provide her services up to 225 days per year.

As a result of a status investigation, HMRC issued assessments totalling £419,000 in back taxes on the basis that the engagement was under a contract OF service rather than a contract FOR services and therefore she should be treated as an employee of the BBC.

In the ruling the judge said “In our view a hypothetical contract of that length for at least 225 days per year and terminable only for a material breach points toward a contract of employment.” The obvious point being that a stable, regular and continuous arrangement is not an arrangement of self-employment which is generally characterised by a “succession of short term engagements.”

In addition, the FTT found that the BBC had significant control over Ackroyd both as “ultimate arbiter” and during day-to-day operations.

There were therefore a number of indicators of employment:

  • The length of the contract
  • The fact that the BBC were required to pay CAM Ltd even if Ackroyd’s services were not required
  • Through the editorial team, the BBC would have ultimate control over the output
  • No substitution was allowed
  • Ackroyd was restricted from providing services to other organisations without BBC consent
  • Ackroyd was contractually obliged to perform the services, and the BBC was contractually obliged to pay fees to CAM Ltd each month

It can be seen from this list that there are problems with Mutuality of Obligation, Right of Substitution and Direction and Control. Those with IR35 knowledge will know that that those three factors are nothing new, and therefore provides no new legal points, so in that regard this case is not significant. However, it does bring the matter to our attention once more. It serves as a reminder that IR35 isn’t going away and contractors would do well to learn some lessons from the ruling.

What lessons can be learned?

Always carry out due diligence before and during an engagement

Your employment status is not a matter of choice, it’s a matter of facts. You should always have your contract reviewed by a professional. It’s not good enough to rely on your agency or yuor client saying it’s OK. In this case, the BBC insisted on a limited company engagement and assured Ackroyd it was in order. Ackroyd’s accountant confirmed this. These facts made no difference to the ruling. Get an IR35 expert to review your contract and working practices at the start and review these periodically.

Avoid minimum hours or days in a contract

Minimum hours or days implies Mutuality of Obligation (MOO). This an employment pointer and should be avoided.

Be careful of long-term contracts

A series of sequential contracts with the same client may be fine, but avoid a fixed term contract stretching over a number of years. This, again, implies MOO.

Be wary of control via documents and procedures

While it was not explicit in the contract, it was implied and generally accepted that Ackroyd was required to comply with the BBC’s Editorial Guidelines. This was a key factor in the Court’s decision to deem her subject to Direction and Control.

Be realistic on terms

This case was really an open-and-shut case. The engagement failed as self-employment on virtually every count. A contractor should recognise that while it’s easy to take the low tax path, in the long-term it may be better to accept that a contract is not one for an independent contractor and either take it on under an employed arrangement or walk away altogether.

And finally, as a side lesson:

Don’t put an investment property in your company

While researching for this piece, I looked at the accounts filed by CAM Ltd at Companies House. These showed that there is investment property in the company. IR35 tax is a corporate liability, not a personal one, and therefore any assets in the company are at risk if the company cannot meet its obligations. Ultimately, HMRC can order the winding up of the company, and the sale of its assets to recover the tax due, or as much of it as possible. I have long advocated for ring-fencing assets to protect them against liquidation actions and this case is a good example of why.

In summary, then, this case isn’t really legally significant as it really was an open goal for HMRC. But it’s significance can be seen on other ways: It raises the awareness of the issue again, it gives HMRC confidence, and will provide them with more ammunition to drive through the proposed reforms. Make no mistake, HMRC are coming and we need to prepare.

Autumn Budget 2018 – Our First Thoughts

Autumn Budget 2018 – Our First Thoughts

The Budget Statement sets out the government’s fiscal plan for the short-term future of the UK economy but there was really only one item of any interest to the country’s contractors so let’s get straight to it.

Private Sector Off-Payroll Reforms

We knew that the Chancellor was going to introduce the IR35 reforms to the private sector, we just didn’t know when. Now we do: April 2020.

These changes mainly revolve around shifting the burden of responsibility for confirming IR35 status from the contractor to the end-client or agency. If the contractor is IR25 caught then the agency or end-client will also be responsible for operating tax and NI deductions. The risk of getting this wrong will also rest with the end-client or agency and the concern is that the risk-averse will simply make blanket “inside-IR35” assessments as has been seen in the Public Sector.

We are encouraged already by the private sector response and we, along with our legal team and other advisers and pressure groups will be working tirelessly to come up with workable solutions and plans so that our clients, and the wider contractor community, are not adversely affected.

Personal Allowance and Higher Rate Threshold

From tax year 2019/20, the personal allowance will be raised to £12,500 and the higher rate threshold will increase to £50,000.

Entrepreneurs’ Relief

With many contractors moving back to staff positions because of the uncertainty around the off-payroll reforms, ER and Capital Gains has been an important tax planning tool.

Effective from April 2019, in order to qualify for ER, contractors and other entrepreneurs will need to have owned their business for two years (up from one) before selling or disposing.

VAT registration threshold

The VAT registration threshold will be maintained at £85,000 for the next two years at least.

Commenting on the IR35 reforms, Alan Broome, Broome Affinity Group’s directors said “On the face of it, this is good news for those of us inside the contractor bubble, as we know the reforms are being implemented in eighteen months and not the unworkable six months many (including us) feared. But other than that there are a significant number of concerns about the reforms, significant enough in fact that the government have admitted that it will already need to refine the reforms.”

So once again, we are in what our pals at IPSE describe as a “holding pattern despair” with the only certainty being that things are still uncertain. For now, it’s business at usual at Broome Affinity Group and we’ll continue to strive to provide the best contractor accounting solution around. Rest assured that in the meantime, and for the next eighteen months at least, we are working hard, very hard indeed, on ensuring the contractor model continues to be viable beyond April 2020.

Tax enquiry insurance. Take it seriously.

Tax enquiry insurance. Take it seriously.

We take tax investigations very seriously and whilst we always ensure returns are filed in a manner that should limit the possibility of an enquiry HMRC select many cases each year for random enquiries. No-one can afford to be complacent! Obviously if you are selected for an enquiry we would aim to settle it quickly and with minimal fuss and disruption to you and your business and would aim to minimise any additional tax liabilities. However, answering all of HMRC’s questions could be very time consuming and some investigations can take several months to deal with. As a result our costs of dealing with HMRC’s queries can be significant.

Our highly-trained specialists are experienced in dealing with all forms of tax investigation and have detailed knowledge of the respective rights and powers of the taxpayer and HMRC. We can guide you through the process and negotiate directly with HMRC to ensure that tax, interest charges and penalties are minimised.

However, it is our belief that the number of tax enquiries will increase, and to provide peace of mind to our clients, BroomeAffinity, working together with Croner TaxWise, can offer you cover against such an investigation.  Through what we believe to be the best cover available, Croner can offer you an insurance that will pay up to £100,000 towards your accountants’ fees in the event of a tax investigation with no policy excess.

Our Tax Investigation Insurance covers all of the following (and more):

  • Full Enquiries
  • Aspect Enquiries
  • Business Inspection Notices
  • VAT
  • IR35 disputes

The premium for a standard limited company is just £159.00 per year. I cannot stress how strongly I recommend you get this cover. Contact us for more information.

Doing your own books? D-I-Why?

Doing your own books? D-I-Why?

When it comes to accounts and book-keeping, there are some mighty impressive apps around like FreeAgent and HMRC’s own online tools which might tempt some contractors into thinking that they could save themselves a few quid by DIY-ing their accounts. In true “turkeys not voting Christmas” fashion, I disagree. It is possible, but is it wise? Here’s 5 reasons why I think it’s a mistake:

1.) Do you know enough?

Accounts and tax is complicated, and ever-changing, and while the online solutions and applications are helpful, they can only do so much and if you do not input the correct information ultimately you’re going to get the wrong results.

2.) Is it really economical?

Maybe, maybe not. I reckon that a contractor who DIYs the accounts likely spends the following time on the accounts:

VAT returns 4 X 1 hour

Payroll 12 X 30 minutes

Payroll year end 1 X 1 hour

Personal tax return 1 X 2 hours

Company year end 1 x 5 hours

That adds up to eighteen hours and I think I’m being generous here. Eighteen hours is 2.25 professional days. If your day rate is £400, the “opportunity cost” of this time is £900. Factor in software costs of c£300 per year and you’ll find the the DIY cost is £1,200 which is comparable to many accountants.

3.) Can you be bothered?

We are all constantly bombarded with articles about quality of life, the work/life balance and what have you. Maybe you should consider this when you are deciding whether or not to appoint an accountant. Instead of spending Sunday afternoon catching up on your accounts, why not fly a kite with the kids, take in a film, or simply sit and do nothing for a while. You work hard, you make a good living, you owe it to yourself and your family to take some time off.

(I call this the “can I be @rsed factor”: Yes, I could paint my house, and yes, I could clean my own windows. I could probably lay tiles in my bathroom if I really put my mind to it. But can I be @rsed? Nope. I’d rather be doing something I enjoy)

4.) What happens if you get a tax investigation?

It’s well known that a tax or VAT investigation is a scary thing. And, like dogs, HMRC can smell fear. If HMRC know that you do not have representation, they will exploit this. They’ll ask you questions you don’t know how to answer, they’ll quote legislation to you that you’re unfamiliar with, they’ll generally make your life a misery. If you have an accountant, they’ll take the strain for you. And if you have tax enquiry insurance it won’t cost you a bean.

5.) Do you really appreciate the value that the accountant adds?

This is the real question. Yes, we do do the boring crap like filing your accounts and managing your payroll, but we also add value. If you don’t know this, it’s probably no surprise – look at most “What We Do” sections of a contractor accountants website, and it’ll list a load of compliance tasks that they look after for their clients. Which is great but it doesn’t truly reflect how we operate: a good contractor accountant will be constantly reviewing your financial position to ensure optimal tax efficiency. We can see things you won’t necessarily know about. Fifteen minutes discussing your drawings strategy with your accountant might save a few thousand in tax. I had a conversation with a new contractor yesterday who was considering the DIY route. I mentioned to him that he should make his wife a shareholder in the company to utilise her £5,000 dividend allowance and instantly saved £1,625 for the client.

Incidentally, if you look at our “what we do” section you’ll see we focus on the added value, not the compliance. As an industry, we’re poor at communicating the benefits of dealing with us. We’re trying to change that. You don’t see Audi marketing a new model with “it’s got four wheels, some seats and engine”.