Harnett Accountants Wimbledon – Advice on IR35

Harnett Accountants Wimbledon brings you this advice about IR35 law, and an accompanying report from the Accountancy Age website, revealing that IR35 investigations have been stepped up again by the taxman, bringing in over £1million so far.

“INVESTIGATIONS into freelancers underpaying tax have doubled, with the taxman scooping more than £1m from its efforts.

The number of probes into whether freelancers should be caught under IR35 rules – where they are effectively employed, rather than working for themselves – has doubled to more than 50.”

source: full article

Last month, our accountants in Wimbledon brought you this information about IR35, which could help protect you from being unfairly targetted by the taxman if you run your own company…

If you provide services through your own personal service company you may be aware of a certain tax law known as IR35. The IR35 rule imposes an extra charge on your company if you’re treated as an employee of your customer or customers, or if you worked for the customer directly. It can be difficult to pin down exactly when IR35 should apply, as it depends on the relationship between the contractor and the customer, which will be different in every case.

HMRC have tried to make generalisations about which companies come under IR35 and which don’t. They’ve drawn up a set of business entity tests with a scoring system, to help you decide whether your business would be at high, medium, or low risk of being investigated for falling under IR35.

These tests are not derived from the tax law. They simply represent HMRC’s view of the risk of a business falling under this legislation.

The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. These IR35 business entity tests do not change the law one bit, and will probably be ignored by the Tax Tribunal.

If you choose to use the IR35 business entity tests, you don’t have to declare your score to HMRC, the tests are merely for your own guidance. However, if you’re worried that the business entity tests produce a high risk score for your business, we should discuss why this is the case. Are there any changes which can be made to the way your business operates which would make it less likely to be caught by IR35?

We can advise you on the correct tests for IR35, which would be recognised by the Tax Tribunal, so do ask if you would like some reassurance.

It may also help to read up on the background of the legislation. You can find some information about it on the HMRC website:

IR35 background

How to tell if the legislation applies to you or your company

What to do if you disagree with HMRC’s decision to try and tax you under the legislation

Specific information for owners of limited companies or partnerships

You should take the information with a pinch of salt however, as the HMRC website will try to convince you that you should fall under IR35. Take the following examples…

According to the HMRC website, you do fall under the legislation if you can answer yes to this question

Would you be an employee if you worked for your client directly and not through your company or partnership?

This clearly doesn’t make very much sense, as the same could be said for any small service company, and therefore all such companies would have to pay IR35! Furthermore, if you can answer YES to most of these questions, you also fall under IR35…

  • Do you work set hours, or a given number of hours a week or a month?
  • Do you have to do the work yourself rather than hire someone else to do the work for you?
  • Can someone tell you at any time what to do, when to work or how to do the work?
  • Are you paid by the hour, week or month?
  • Can you get overtime pay?
  • Do you work at the premises of the person you work for, or at a place or places he or she decides?
  • Do you generally work for one client at a time, rather than having a number of contracts?

Many small service companies can surely answer yes to the above questions, and still be very much their own independent company. The taxman doesn’t seem to understand that small service companies often consist of one person, they often have to do exactly what their clients/customers demand of them, but they are still very much their own separate entity with their own independent needs. This is not to mention the fact that many such contracts are very temporary in nature and will not provide anywhere near the same level of security as a permanent contract of employment.

However, as we have stated earlier in this blog, much of the information on the HMRC website is simply their opinion, and not all of it is reflected in tax law. Many claims would not stand up in an independent tribunal, and you should always make sure that you know your rights as a taxpayer before you hand over any money. Please contact our accountants in Wimbledon by email or on 020 8977 3883, and we will provide a free one hour, no obligation consultation to discuss the details of your case, and advise you as to whether your company does fall under the legislation or not. If your company does not fall under IR35, and the taxman is demanding money from you, then we can help to guide you through the appeals process.

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