Two recently published articles discussed the current level of understanding surrounding IR35. The first, an article by AccountingWeb, revealed details of a survey* which had assessed the level of knowledge of IR35 among high street accountants to be ‘very vague’ and stated that ‘many accountants lack detailed knowledge about IR35 legislation’.

The second article, written in response by Carrington Accountancy, considered that the AccountingWeb article had ‘painted the picture that following much research in the UK, the consensus is that  most high street accountants have very little comprehension of the intricacy’s and legislation surrounding IR35’. Consequently, they felt that the AccountingWeb article had caused ‘massive uncertainty across the board’.

Differences aside, the overriding message was that in the world of professional contracting there is confusion surrounding IR35 and individuals need to be better informed if they find they have to defend themselves against, or ideally avoid, an HMRC investigation.

Key points to note:

• In the current economic climate, increasing numbers of individuals are switching to contracting; of these contractors, unofficial estimates state that around 20% will be affected by IR35, 20% will be outside and the remainder will fall in the ‘grey’ area.
• The rules are complex and it is often difficult for an individual to establish how they are likely to be affected by the legislation.
• It is important that each new contract (or even extension) is considered individually as the situation can change during the lifetime of a contract.
• Determining whether a contract falls ‘inside' or 'outside' IR35 can have significant financial implications.  Understanding the legislation is essential to avoid unnecessary overpayments on the one hand or a nasty surprise on the other.

Factors which determine whether or not a contract falls 'inside' IR35 include:

Control /independence – how much control does the contractor have in influencing how the project is run - who makes decisions about timing or what equipment to use?  Typically a contractor will have more independence than an employee.
Personal services/subsititution – is the client specifically seeking the skills of the individual or could another person be sent in their place to provide the service?  IR35 legislation places considerable importance on whether or not a person is under an obligation personally to provide services.
Mutuality of obligation – is there an obligation that the individual will be paid whether there is work or not? An employee will be paid and will be available for work whether there is work available or not. A contractor on the other hand would not be required to stay, and would not be paid, if no work were available.

If IR35 is ignored, and the company investigated is found to be within IR35, the consequences and penalties can be severe. Therefore, IR35 reviews should be undertaken regularly and most importantly:

• Whenever the contract is up for negotiation or renewal - each and every time
• When end of year PAYE returns are submitted (a crucial time for a contractor to declare if they are working ‘inside IR35’)
• Between the end of the tax year and the final date for payment of personal tax returns. (However, it is strongly recommended that a review be completed before self-assessment personal tax returns are submitted.)

A final point to note is that there is a widespread belief that HMRC’s provision for IR35 enforcement is under-resourced and consequently that the threat of investigation is minimal. However the evidence is that Government and HMRC are becoming increasingly determined in their efforts to collect the correct amount of tax from 'de facto employees' who declare artificially low taxable incomes by claiming expenses and using structures only appropriate to bona fide self-employed individuals. Often, it can be an unrelated investigation of an end client that leads HMRC to approach individual contractors who, in such situations, are easy to trace.

Given the complexity of the situation, and the potential risks, one thing is sure - it is becoming ever more important that contractors seek specialised and trustworthy IR35 advice.

* Survey reference: Freelance World, mystery-shopper survey of high-street accountants, 2009