One of the more unpopular pieces of legislation in recent times is “IR35”. In 1999 the government attempted to sneak through a whole new tax regime with minimal public discussion by hiding the details in the Inland Revenue (IR..) series of publications that were designed to explain budget pronouncements. This was so unpopular that no budget publication in later years was given an “IR..” tag!
Why was it so unpopular? The legislation is based on “notional” arrangements, and HMRC thought that this gave them a free hand to persecute the small businessman. Fortunately, the commissioners and, later, the first tier tribunal disagreed and HMRC lost a significant number of well publicised cases, including Lime-It Ltd where a company was forced to spend over 2 years not in productive work but in fighting HMRC’s unreasonable demands.
The House of Lords has recently criticised HMRC for it’s dealings with IR35, and called upon them to show that the cost to individual taxpayers was outweighed by the revenue protection that it provided. In response, new guidance has been issued by HMRC which is, in their words, more “user friendly”.
The provisions apply to the provision of personal services and to situations where an intermediary, ie a limited company, is inserted into a chain of contracts. IR35 says that special tax rules will apply when the “notional contract” between the contractor and the service provider would be a contract of employment.
The new guidance allows people who are unsure of whether they fall foul of IR35 to send an application in to HMRC for a ruling on whether they are inside the legislation or not. The new guidance covers 19 pages and is split into 6 sections:
- Intermediaries legislation
- How to work out if it affects you
- How it applies to you
- Deemed employment payment
- Contracts
- HMRC enquiries
HMRC provide a “Contract Review” service when they will look at the contracts and provide an opinion as to whether the contracts fall within IR35. This opinion is not binding, but most commentators believe that disputing the opinion will rapidly lead to an IR35 enquiry with the strong possibility of increased penalties for ignoring their opinion. Another case of “Heads We Win, Tails You Lose”.