Why Employment Tax Status could be a risk!
IR35 and employment tax Status generally is still shrouded in confusion. One thing is certain, namely that if you are in business you are likely to be affected by it. This may be because you are a contractor or consultant yourself, or because you engage them. In my view, whilst a good contract between a limited company contractor company and its client should have a clear clause allowing substitution, in practice it will be very difficult for someone like an IT contractor who is likely to have unique skills based on his experience to send a substitute into their client.
What is likely to be more relevant is the need to demonstrate that consultants or contractors can use their own way of working in terms of working hours and time spent off site. They should not be part of line management and in addition need to distance themselves from any “mutuality” by working too long in one contract or role or by contractual terms which guarantee them work either within the contractual term or in the future. Importantly the contractual terms must be consistent with what happens in practice, which is often not the case. These basic principles apply whether the consultant/contractor is self-employed or has his own limited company. Failing to demonstrate these “badges of trade” could result in the tax status of consultants/contractors being challenged.HMRC get tough:
H M Revenue and Customs (HMRC) have had limited success with policing “self-employed” workers and IR35 due to a lack of resources but this could be about to change, driven by Agency Worker regulations. HMRC now have the power to look at agency lists. Agencies have historically used “self-employed” manual workers working under the direction of clients. HMRC are now looking to reclassify these workers as employed and have brought in powers to enable them to do so. Failing the “control” test which they invariably do will enable HMRC to catch them in the employment net. Agencies may then have to pick up the resultant tax bill.
Does this affect you?
Does this affect self-employed consultants, limited company contractors and their clients? Well unfortunately yes as agencies may have self employed consultants and limited company contractors on their books and HMRC will potentially have access to details of who they are how long they have been working for clients and their working patterns. It seems to me that this can only increase the chance of tax status investigations based such a “helpful” database. This in turn impacts on companies who use limited company contractors through agencies or directly, in so far as they may lose a valuable resource should a contractor lose an IR35 challenge. Businesses using self-employed consultants could also end up with an unexpected tax bill should any directly engaged consultant fail a tax status test.