Why is it that phrases or mantras which make you take the most notice often involve three key words: ‘I came, I saw, I conquered’ or ‘Education, Education, Education’ or even ‘The Good, The Bad and The Ugly’?
For contractors, the Summer Budget has produced these three key words: ‘Supervision, Direction and Control’. When it comes to travel and subsistence expenses, it appears contractors will have to prove they are not under the supervision, direction and control of their end client, in order to be able to claim their expenses for travelling to an engagement.
Although control has always been one of the key tests for IR35 – and, again three is the magic number – we must not forget personal service and mutuality of obligations. We believe it will now be extremely important for contractors to prove that they are not under the supervision, direction and control of their end client in order to establish they are operating outside of IR35.
Further issues emerged including:
- Tax rises: contractors will pay more tax on dividends (Summer Budget Page 48, from 1.185) and those who are the sole employee of their own limited company will be prevented from claiming the Employment Allowance (Page 46, 1.198)
- The Treasury wants to review the effectiveness of IR35 again.
Contractors should be focused on:
1.180 The government recognises that many individuals choose to work through their own limited company. However, where people would have been employees if they were providing their services directly, anti-avoidance legislation commonly known as IR35 introduced in 2000 requires that they pay broadly the same tax and National Insurance as other employees. As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough. Non-compliance in this area is estimated to cost over £400 million a year.
1.181 The government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. The government wants to find a solution that protects the Exchequer and improves fairness in the system.
So now we have three more key phrases:
‘it is clear that IR35 is not effective enough’
‘how to improve the effectiveness of existing IR35 legislation’
‘find a solution that protects the Exchequer and improves fairness in the system’
We would agree that IR35 is not effective enough; it is an extremely confusing piece of legislation. However, the elements which should really concern contractors are ‘how to improve the effectiveness of IR35 legislation’, which is likely to lead to more IR35 investigations, not less; and how to ‘find a solution that protects the Exchequer’ because that is likely to be the Treasury’s real motivator.
We believe this means contractors should have three priorities of their own:
- Know your IR35 status – get your contract reviewed
- Protect your business from the costs of an IR35 enquiry
- Think about insuring against the potential tax loss if you lose an IR35 enquiry.
Even though the Summer Budget suggests that bad things come in threes, we believe at Abbey Tax that we have three suitable answers to the needs of contractors.
Author: Paul Mason, National Contractor Manager
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