IR 35 - the taxation of personal services: part two
In his second article on the new IR 35 legislation, Kevin Miller, a chartered accountant and a director of the 6,000 strong Professional Contractors Group, answers some commonly asked questions
I find my contracts through an agency, does this mean I will be caught by IR 35?
Not necessarily but the Revenue has said that in its view anyone who works through a standard employment agency style contract lasting more than a month is likely to be caught by the rules. This view ignores the possibility, for example, that the contract might allow a right of substitution.
I have seen advertisements for contracts that are guaranteed to be proof against IR 35, do they work?
No contract by itself is certain to pass the IR 35 tests. The Revenue can look at all the contracts involved in the chain between contractor, agency (if any) and client and will want to be satisfied that the terms set out in the contract are matched by the working relationship that actually exists between the contractor and the client. If the contractdoes not reflect reality then its terms will be ignored. Contracts that claim to be IR 35 proof will only work if the client will actually accept and sign the contract and it reflects the actual working relationship. Many of these so-called IR 35-proof contracts are unrealistic as contracts between two companies.
I have seen advertisements for IR 35 solutions that rely on using offshore company arrangements, will these work?
An offshore intermediary is treated as having a place of business in the UK regardless of whether in fact it does so, as long as:
the worker is resident in the UK
services are provided in the UK the client or employer carries on a business in the UK.
So these arrangements only work if the relationship between the contractor and the client pass the IR 35 tests.
If some of my work is overseas will I be subject to IR 35?
The tax treatment of income from contracting depends on the residence status of the worker and the location in which the duties of the contract are carried out. If the contractor is resident and ordinarily resident in the UK for tax purposes, then the deemed payment will be taxable in the UK, regardless of where the duties are carried out. If the contractor is resident but not ordinarily resident he or she is taxable in theUK on all emoluments (deemed payments) arising from duties performed in the UK and on remittances to the UK of payments arising in respect of overseas duties.
Is there any key test to ensure my contracts pass the IR 35 tests?
There are two tests in particular that should help ensure a contract passes the tests:
The right of substitution. This need not have been exercised it need only exist.
The ability to make a profitor loss on the contract, for example by working for a fixed price.
While the lack of either of these does not condemn a contract to failure their presence greatly assist success.
How will the IR 35 rules affect companies in the construction industry?
The deemed payment calculated under the new rules will be based upon thefull amount of the company's income.
Credit for any SC 60 tax will be given in the usual way as for any other companyin the construction industry.
The Inland Revenue has published guidance on IR 35 in the form of a Tax Bulletin at www.inlandrevenue.gov.uk/ir35/index.htm
For a more impartial analysis, visit the Professional ContractorsGroup site at www.ir35update.co.uk