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The PCG have spoken out regarding their view that IR35 regulations should not affect contractors who are working on several different projects for the same client. It is the view of PCG that HMRC should only be concerned with the nature of the arrangement between the contractor and client and not the duration of the agreement.

The PCG believe that contractors must be able to prove that they are working on separate projects, even if this is for the same client, and that this is not the same as ongoing work. If the contractor can prove this, it is the belief of the PCG that HMRC will “not have a case”. It is also important that contractors can prove to HMRC, if necessary, that they have an “unfettered right of substitution” and that through their contractual agreement and subsequent working practices they have control over the work they carry out.

PCG said: “HMRC must prove that personal service, control and mutuality of obligations (the expectation that work will be offered and accepted) existed in the engagement.”

Managing director of Brookson, Martin Hesketh responded: “This news article confirms the importance of contractual documentation. Not only should contractors who work on multiple projects ensure that there are contracts in place for each, it is essential that you read the contracts and ensure that they are consistent with your working practices and accurately reflect your relationship as an independent contractor with your client.”

The Conservative party has announced plans to reform tax systems for the self employed. One option which they are currently considering is to give those individuals who work via a one person company, the right to opt out of employment. In real terms this means that those individuals would lose their entitlement to maternity pay, statutory redundancy pay and jobseeekrs allowance. They  also be liable for Class 2 NICs at £2.40 per week as opposed to Class 1 NICs.

Shadow Business Minister, Mark Prisk, spoke to The Telegraph about the current tax system, stating that it was unfair for people who worked outwith the traditional employment model. In particular he made reference to IR35. This legislation required contractors to prove their  independence and if they are unable to, they are required to pay NICs alongside their ‘employer’.

Mr Prisk said: “The current government has treated the self-employed disgracefully. More often than not they have treated them as if they are on the fiddle, which is wholly unacceptable. We want to reform the system.”

As the Tories set out plans for reform, they have been working alongside the PCG. Their head of public affairs, Simon McVicker, said: “”We have been talking to them about reforms and getting rid of IR35 and have been looking at some options. All we know is that they are sympathetic to the position, as are the Lib Dems. Opting out of NICs would be a large step.”

He concluded: “We are not trying to avoid taxation, we are looking for a fairer, more transparent system.”

Freelancers and contractors have been left disappointed by the Chancellor’s pre-budget report. In fact the sector has once again been left feeling irrelevant despite the important part that contractors will play in the recovery of the economy.

There had been hope that the PBR would promise to repeal the controversial IR35 rule but this did not happen. Contractor accountant, Brookson, fear that the Chancellor missed an opportunity with their managing director, Martin Hesketh, stating: “It is fair to say that the 2009 Pre-Budget Report has been another missed opportunity for the flexible workforce. Initially, there seems to be very little in the report which supports self-employed professionals. Yet again this shows the failure of the Government to recognise the value of this population as the economy strives to recover from the recession. As usual though, there is a lot of work to be done to examine the detail in the report to ensure that there are no major implications for the contracting market within the detailed documentation.”

He continued: “While the Chancellor did refer to the flexible workforce in his speech, little direct support has been proposed. A number of provisions have been announced to support a number of key industries, including digital, bio and low-carbon technology, to help generate both growth and revenue over the coming years. This can, however, only be seen as a potential opportunity for those operating within these sectors, which are heavily populated by self-employed professionals.”

The PCG were also in agreement that despite the Chancellor constantly referring to fairness throughout his speech, the report was actually far from fair to contractors.

John Brazier, PCG managing director, stated: “The Chancellor claimed that the UK has the most flexible labour market in Europe and yet the iniquitous IR35 was not abolished, and a categorical commitment to drop the ‘Income Shifting’ proposals was not in the PBR. This directly hinders freelancers in their work and makes the economy less flexible. PCG firmly believes that increasingly flexible labour markets are essential to get the UK out of this very deep recession.”

He concluded: “There was a lot of talk by the Chancellor about fairness, however this PBR has failed the fairness test for the UK’s 1.4m knowledge based freelancers. IR35 was not abolished, NICs are to go up in 2011, by double what he previously said and the only crumb of comfort is that the small business corporation tax rate rise is to be deferred. The borrowing figures are huge and the public expenditure cuts in years to come are bound to be savage, affecting all sectors of the economy and ordinary people.”

HMRC are increasingly choosing to launch IR35 investigations on contractors who work through agencies. HMRC are particularly interested in the substitution clauses which are commonly used as a test of employment status. The right of substitution clauses exist to allow another contractor to complete a piece of work in place of the original contractor.

Kate Cottrell, former Inland Revenue tax inspector, commented: “We are seeing more and more IR35 investigation cases where a claimed substitution clause has simply been treated as one clause amongst many carrying little weight in the [employment] status argument.”

While speaking to Contractor UK, Ms Cottrell stated that her experience showed “most substitution rights are unrealistic where there is an agency in the middle.” The only difference occurs when contracts are back-to-back.

She continued: “In most cases the client will state that they would expect the agency to provide the replacement, if this was necessary, and there would be nothing wrong in a contract that passed this down the line.”
Commenting on IT contractors, Cottrell said: “It all comes down to educating all the parties in the contractual chain and ideally at the outset. A contractor should seek the views of the client if they are planning to rely upon a right of substitution to take them outside IR35. On the basis that most substitution clauses are unreasonably fettered and do not work, I would recommend concentrating on the control issues in the contract which is the most important status issue.”

The Professional Contractors Group (PCG) has written to the chancellor, Alistair Darling, ahead of his pre-budget report with a list of three demands. They are requesting that he scraps IR35, provides a less restrictive business model for freelancers to work within and drops ‘income shifting’ rules.

The PCG informed the chancellor that the recession has had a negative effect on those who work freelance, with a 12% fall in those working over the past year and an average drop in turnover of around a third.

Writing to the treasury, Mr Bryce, chairman at PCG acknowledged the pressure on Mr Darling regarding this pre-budget report given the current economic climate. However, Bryce stated that freelancers are not given a “fair deal”. He called IR35 “the largest single impediment to freelance working” and demanded that it be withdrawn.

Bryce wrote: “We know from past statements by ministers that IR35 is not known to be a revenue-raising measure. It is not clear that such monies as it raises in extra tax offset the considerable expenditure by HM Revenue and Customs in pursuing the many fruitless enquiries known to us.”

PCG also explained to Mr Darling that the current restrictive rules mean that, without a legal form, agencies are unable to pay freelancers gross.

He wrote: “PCH would like to see this measure abolished: it is a clear example of a tax measure distorting market behaviour, contrary to the government’s own express desire that the ‘tax tail’ should not ‘wag the business dog’”.

With regards to the proposed family business tax, Bryce said: “We welcomed the decision in last year’s Budget ti again postpone the introduction of legislation regarding ‘income shifting’, but we reiterate that it is essential these proposals are dropped completely with immediate effect. Treating jointly-owned businesses any differently to other businesses is iniquitous and unfair. These proposals fail to take into account the shared risk and responsibility involved in running a business, and would harm thousands of such enterprises.”

An IT contractor who has been the subject of an IR35 investigation for the past five years has finally won his case against HMRC. This freelance worker had provided an abundance of evidence to prove that he was self-employed and not subject to the control associated with working for anyone else, yet HMRC began investigating him at the end of 2004.

This freelance worker has been supported by the Professional Contractors’ Group (PCG) throughout this process. They have commented that despite HMRC probing this freelancer for nearly five years, they did not even come close to proving that he owed them taxes as a result of having ‘employee status’. The group said that one of the main issues was that HMRC did not understand the way that he worked or the manner in which he worked for his clients. Unfortunately this is a common misunderstanding between contractors and HMRC.

The freelancer in question actually closed his company which the PCG said left “no way of paying the liability”. HMRC themselves held up the investigation, at one point taking five months to reply to the freelancer’s adviser.

The IT contractor changed his adviser to Accountax to coincide with the case going to independent review in June. Accountax compiled a six page report which detailed the manner in which he worked and the failings of HMRC throughout the investigation process. Last week, Accountax were contacted by HMRC to say they were now dropping the case.

PCG made this comment on their website: “This case demonstrates the fundamental importance in arguing IR35 enquiries forcefully and applying the pressure on HMRC. Over four years worth of distress and painstaking delays for the PCG member neatly tied up within 9 months simply because the pressure was put on the inspector to reply to all points, on time. For the contractor’s part, he said he felt his adviser’s efforts in recent months had forced the Revenue to withdraw, and added he was ‘delighted the nightmare was over’.”

The recent Stringer v HMRC ruling by the House of Lords declared that certain contractors could claim holiday pay from their clients. Certain contractors, so-called ‘permtractors’ could be claiming relatively large payouts. This news could go a long way to encouraging clients to ensure that the contractors they employ are outside of the IR35 legislation. This ball is certainly in the client’s court, especially considering the recent ruling on the Tilson case.

Accountax Consulting were one of the first to report on this case. Mark Taylor from the group said, “The Lord’s ruling means you can be self-employed yet still be a worker entitles to paid holiday. The ruling means their claims are no loner limited to the current annual leave year.”

Taylor then discussed the unlimited claims that could result from this ruling, stating, “In the past, most firms would pay off the worker, as a year’s holiday pay – the previous maximum – cost less than an Employment Tribunal defence. However, with one backdated holiday award, that in the Canada Life v Gray case, being in excess of £30,000 the financial impact on clients could be disastrous.”

Contractors will need to think very carefully about their IR35 status before they consider such a claim as HMRC will ask some tricky questions of any contractors attempting to claim holiday pay who have previously declared that they are working outside of the IR35 legislation.

Contractors working through an umbrella company are unlikely to benefit from this latest ruling as they will have a contract of employment with their umbrella company. However, they should check the holiday payments they have received from their umbrella company over the years.

Source: Contractor Calculator

The Professional Contractors Group (PCG) has submitted another Freedom of Information request to HMRC following an ex-government minister’s refusal to disclose data on IR35.

Last month, the then Treasury Minister, Kitty Ussher was asked by Labour MP Terry Rooney for information regarding how many IR35 investigations had been conducted over each of the past five years . He also asked her how many of these investigations had resulted in prosecution and how many had resulted in an increased tax bill.

In an unprecedented move, she refused to answer for fear of non-compliance. Her response was, “The intermediaries legislation, commonly known as ‘IR35′ was introduced with effect from 6 April 2000 to counter the avoidance of employed levels of tax and national insurance by individuals providing their services through intermediaries. Disclosure of HM Revenue and Customs’ compliance data relating to the legislation would result in a risk of non-compliance with the legislation. Accordingly I am not able to provide the date requested.”

Days after the question was asked of her, Ussher was sacked by Gordon Brown for her part in the MP expenses scandal.

The IR35 rule aims to tax contractors as employees. The PCG submitted a Freedom of Information request back in May which showed that IR35 was raising just £1.5 million per tax year. The PCG disclosed that of the 1,468 IR35 investigations that they have been involved in, only six have resulted in an the owing of additional tax.

The PCG have now asked the same question as Rooney under the Freedom of Information Act.

Freelance World has conducted research into high street accountancy knowledge of contractor legislation and the results are worrying.

The survey was based on twelve individual accountancy firms. The majority of them were offering contractors a ‘targeted solution’ without the knowledge that this is forbidden under the MSC legislation.

The IR35 tax rule has been in existence since 1998. Contractors are subject to IR35 which taxes freelance workers as employees. Freelance World declared that the firm they surveyed had a “lack of detailed knowledge” and “worryingly vague knowledge” regarding compliance.” One firm in particular said that contractors “didn’t need to worry about it” while another said the rule had “died a death”.

Managing director of Freelance World, Alasdair McGill, commented: “What these firms should be telling their prospective clients is that IR35 work should be handled by an employment law specialist…, not telling them that it is nothing to worry about.”

He continued, “Accountants should not be issuing advice on IR35 unless they have real experience of employment status and are confident about defending their clients in front of the tax tribunals.”

Mr McGill drove home the message of how crucial the right tax advice is for contractors. Failure to comply with the relevant tax legislation could result in future credit problems due to HMRC blacklisting.

A representative from HMRC admitted that advice given to freelancers “sometimes presents a too simplistic picture of whether the Intermediaries legislation applies or not”.

Freelance World concluded, “It is quite clear that many high street accountancy firms simply do not have the expertise to advise contractors on key legislation, compliance and management of their specific requirements.”

High Street accountancy firms have been investigated by Freelance World, a contractor services company based in Aberdeen. Freelance World carried out their ‘mystery shopper’ survey which found that many high street accountancy firms have little or no knowledge of legislation pertaining to contractors such as IR35 and Managed Company legislation. They also noted that many of the firms they approached had a “worryingly vague attitude to the need for compliance within the legislation”.

Managing Director of Freelance World, Alasdair McGill said, “We have been genuinely alarmed at the poor advice being given by some firms to prospective clients. It is like going to a GP for treatment when you really need to see a specialist consultant. It is quite clear that many high street accountancy firm simply do not have the expertise to advise contractors on key legislation, compliance and management of their specific requirements.”

He continued, “One accountant offered an off-the-shelf incorporation service – a practice that is prohibited by the Managed Service Companies legislation of 2007. Another told a researcher that they ‘didn’t need to worry about IR35′”

Worryingly, one firm that was approached by the researchers said that IR35 “had died a death”. The repercussions for a contractor accepting that advice could be large HMRC fines and possibly even long term credit problems due to non-compliance. Contractors are therefore advised to only use specialist accountants.