So far, 2018 has been a big year for the controversial tax law known as ‘IR35’. In fact, it’s only April and we’ve already seen two very different but highly publicised rulings on it. And in the wake of these rulings, many freelancers, contractors and self-employed people are being forced to ask themselves whether they could be at risk of investigation over this complex, contentious tax law.
First then, what has happened this year? Well, in February a tribunal for BBC presenter Christa Ackroyd went in HMRC’s favour, finding that she should be under IR35. She was hit with tax back-payments of over £400,000.
In another case, however, an appeal by independent construction contractor Mark Daniels led to an HMRC decision being overturned. Back in 2016, HMRC had determined that a contract between MDCM Ltd (Daniels’ personal service company) to provide construction services to a client from 2012-14 should be under IR35. However, MDCM Ltd successfully appealed the decision, and the First Tier Tribunal found that the engagement should actually have been categorised as self-employment.
This ruling is just more evidence that the complexity of this controversial tax law often makes it too difficult to apply. As Andy Chamberlain, Deputy Director of Policy at IPSE (the Association of Independent Professionals and the Self Employed) commented, “HMRC looked at the relevant factors and decided that IR35 should apply. The Tribunal looked at those same factors and decided that it shouldn’t. If HMRC, with all its expertise seemingly ,cannot make a correct determination, how are public authorities and individual businesses supposed to get it right?”
For many self-employed people, these aren’t distant rulings and abstract questions: IR35 could directly threaten their way of working. Worse, because of its complexity, many aren’t clear how it relates to them and what they can do to protect themselves.
So, what is IR35?
IR35 is basically a tax law that allows HMRC to treat fees paid to a limited company as if they were an employee salary. It was introduced to stop ‘disguised employment’, where employers save themselves money by paying employees as if they were limited companies, allowing them to avoid costs like sick pay, holiday pay and Employers’ National Insurance Contributions.
What is the problem for the self-employed?
Nobody wants companies to evade tax. The trouble is that IR35 unfairly affects the smallest companies: independent professionals and the self-employed. Because of the complexity of IR35, it is often misused, leading numerous freelancers, consultants, non-executive directors and other people who legitimately supply services through limited companies to be wrongly accused of ‘disguised employment’.
What’s worse is that IR35 investigations can be long, intrusive and extremely costly. As we saw in the case of MDCM Ltd v Revenue & Customs, the original determination by HMRC was made in 2016, but the appeal only finally went through a matter of weeks ago.
IR35 cases can even cause major reputational damage. Little wonder then that so many freelancers end up expending large amounts of time and money protecting themselves from the risk of an IR35 investigation.
How can the self-employed protect themselves?
Often the best solutions are the simplest, and that’s certainly true of IR35 protection. Really the best means of protection are staying informed and simply getting the right cover:
- Staying informed: IPSE provide a free Guide to IR35, as well as bi-monthly magazines, fortnightly newsletters and updates to keep the self-employed community informed of any changes that may affect them.
- Cover: tax investigation insurance is perhaps the most direct form of protection from IR35.
- Finding the right services: professional advice and assistance can go a long way – from an accountant with IR35 experience, for example. IPSE offers discounted access to providers who can cover freelancers for up to and including all tax, national insurance, interest and – for the rare cases when it’s needed – penalties.
- Contract reviews: an excellent way for freelancers to protect themselves is getting expert advice on whether their contract fits within IR35 regulations.
- Asking questions: because IR35 is so complex, freelancers need to be ready to ask experienced professionals when they’re uncertain about anything. IPSE gives its members access to tax, contract and legal helplines, as well as the online freelancing community.