Mythbuster Maze: The truths and the myths about IR35 – Part 3

This is part 3 of a 3 part series; you can still read part 1 and part 2 if you have just joined.

Our journey through the maze of IR35 continues…

We are forced to backtrack: have you worked for your client previously as a permanent employee? Generally, if you answer yes to this question, alarm bells will be ringing. The common misconception here though, is that having worked for your end client previously will automatically put you inside IR35. This is not necessarily the case.
The reason this particular question will automatically have a tax inspector rubbing their hands, is that it is indicative of the scenario which started the legislation in the first place: permanent employees of a bank left their jobs, set up limited companies and returned with the same job but better pay due to paying less tax.
The key questions to ask yourself if you have previously worked for your end client as a permanent employee are;
how much time elapsed between leaving permanent employment with the client and starting work with them on a contract basis?
How similar is my contract role to my previously employed role?
Am I working in the same department with the same colleagues?
Have I undertaken other work in-between?
What HMRC will want to ascertain is whether you’re working for the same company out of happy coincidence or deliberate tax avoidance. Whichever it is, their perception of your intentions is key. The longer the period between working for the company and the more differences between the roles will improve your position. Assess your situation before turning down contracts or overpaying tax.

 

Almost there: are you planning on closing your company to avoid investigation? You wouldn’t be the first to think of it nor the first to do it. It is not unheard of for contractors to try and avoid the hassle and headache of IR35 by choosing to close their company and reopen another every few years. If you think you’ve beat the system, you’d be wrong. HMRC can still look into your accounts after your company has closed, albeit less likely with time. On top of the seemingly unavoidable tax man, you’d be wasting marketing efforts every time, so although you are welcome to close your company and start another once you’ve racked up some potential liabilities, you’d probably be wasting your time.

 

Finally, you can see the flag waving, you’ve almost cracked it, but one more question stands between you and that sweet success: what if you are considered inside IR35? The common misconception and general atmosphere that surrounds IR35 is that it is the worst thing in the world to be inside it and that you must tweak your contract and working practices in order to get outside. Although having a robust contract and working practices is important and desirable, and we do like to give you all the options by suggesting amendments for you to improve your status, it is not the be all and end all.
Working inside IR35 is not illegal, you are not going to prison, so don’t panic. Should you be considered inside, you will simply need to go to your accountant and discuss paying a deemed salary (which means you will pay more tax). Nobody wants to pay more tax which is why being outside IR35 is seen as such an outright necessity. Discuss with your accountant whether such a contract is economically viable for you, it may be better for you to turn down the contract or seek a different route such as sole trading where IR35 does not apply.
The problems arise when you are considered inside the legislation and don’t pay a deemed salary. If caught, you could be facing a charge of the backdated tax/NIC, plus interest, plus potential penalties (the size of which is based on how intentional your mistake is deemed). Pay the right tax and stay out of trouble.

 

Congratulations, you have completed the maze, and hopefully learnt a few things on the way. With all of the IR35 status tests, each one is not independent to determining your employment status, they are reliant on each other, with some more important than others. Professional assessments of your status are therefore vital, as you will benefit from the wealth of knowledge and experience held by the reviewer, giving you the best chance possible of success and possibly reducing potential penalties should you be caught.

Qdos offer both contract review services and insurance products for all needs and budgets as well as advice and enquiry defence.

If you have any queries or would like to discuss the points made in any of the series, please do not hesitate to contact our dedicated team of IR35 wizards or leave a comment below.

By:Sam Greenwell

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