Moving from permie to mercenary? Avoid a fine - listen to Ben Franklin
IR35: Dear contractors, if you quack like a staffer, you're a staffer
Benjamin Franklin said that nothing in this world is certain except death and taxes. He also coined the idea that “time is money”, and once wrote that “wine is constant proof that God loves us and loves to see us happy”, so we can assume that he would have understood contractors pretty well.
Taxes may be certain, but the amount you pay can vary quite a bit. As Amazon, Starbucks, comedian Jimmy Carr and Jon Bessell will tell you, deciding tax liability is a matter of judgment, and not everyone’s judgement is the same.
Who is Jon Bessell? He’s the contractor who was stung with a bill for £99,000 when Her Majesty’s Revenue and Customs (HMRC) decided that he wasn’t working for the AA (Automobile Association) as a contractor between 2000 and 2003, but as an employee. The Revenue decided he was inside IR35.
Unless you have £99,000 down the back of the sofa, this should make your sphincters tighten a little. IR35 has been around since the year 2000, and was designed to eliminate what accountants call disguised employment. If you are planning a route from permie to contractor via the revolving door, leaving on Friday and returning after the weekend to pick up where you left off, then expect to attract the attention of HMRC.
Times were that you might take a chance, with a nod and a wink from your manager. Hand you a P45, see you Monday, same chair, same computer, same job, less tax. Try this in 2013 and you will end up being Besselled by the taxmen.
Understand this, friends: if you walked into the office and were asked to point out the guy who wasn’t a permie, you’d have picked Bessell. He wasn’t told how to do his work, and even the Revenue guys agreed his code wasn’t subject to detailed review by his manager. But because he went to weekly progress reviews, joined in team talks and could be spot-checked, it decided he was "integrated" into the business, and so his limited company, through which he billed his client, was liable to pay National Insurance and income tax.
Don't get Besselled
Staying outside IR35 might be the most important achievement that any of us makes. To back this up a little: you have, I assume, set up as a limited company, with yourself as the sole employee, and paying yourself a dividend which is taxed at 10 per cent. So far, so good: it’s efficient, legal, everyone understands it. "The lazy man whose contract means he payeth tax that ought not to be paid," Franklin wrote, "deserveth herrings inside his undergarments."
I made the last quote up, but he’d definitely have said something similar.
So here are the things I think you should know about avoiding IR35 Bessellation.
You need professional help
Get professional help: whenever many contractors are gathered together to test out that thing Franklin said about wine, someone will tell us that they know all about IR35 and you’re fine if you just do this and that. Ignore this person. You don’t need to waste money getting professional advice on your contract, he tells us. Yet oddly, tax accountants don’t tell us how to write code, because they assume we are better at it than they are. So they might, conceivably, know their own jobs better than a bloke in the pub.
What this bloke usually means is that his accountant would tell him that his contract is risky and he needs to renegotiate it, but he thinks there’s no problem because he hasn’t been caught out yet. People like this occasionally get contracts to design safety critical systems. Go figure.
So when your tax advisor tells you that you need to alter your contract, do it. Or, of course, listen to a guy in the pub and take your chances. That’s the joy of working for yourself: no one will stop you from doing something stupid.