Original URL: http://www.theregister.co.uk/2013/09/13/ir35_staying_on_the_right_side_of_hrmc/
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
Posted in Jobs, 13th September 2013 09:23 GMT
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.
Gulp.
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.
The tax people aren't there to make you happy
Don’t mess with Her Majesty’s Revenue and Customs: remember, they do this for a living. A few months ago the Revenue got in touch to query some figures I had submitted in 2011. I joked that, if I was found to have underpaid, they could let me off, because that’s what they do these days. “Sir,” she sighed, immediately understanding the type of fool she was dealing with, “we never let anyone off.”
The moral of this story is not to avoid making stupid jokes in the presence of authority figures – in my case, this would be too optimistic. The point is that the Revenue doesn’t go out of its way to make us happy. That’s not its job. Your limited company status is a sweet enough deal compared to your former life. Don’t mess it up.
Half man, half duck
There are no rules: to be precise, there are many principles, based on rules, but someone will have to use judgment at some point. Disguised employment is a duck test. If you walk like a duck, and you quack like a duck, you’re a duck.
The Revenue offers a set of questions for you to assess your level of IR35 duckiness (they don’t call it that), but there’s no absolute here. All I can conclude from answering the questions is that everyone I know who does this job is half man, half duck: we waddle a bit, sometimes we quack too.
Therefore, manage your inner duck: The big test (but not the only test) of disguised employment is control. Specifically, do you have any control over how you work? Enough control, and you are unlikely to be judged as an employee.
Build it into your contract and don’t just sign whatever is put under your nose. Note that the bar might be set higher than you think it is. Just because you don’t feel like an employee any more doesn’t mean that you aren’t an employee for tax purposes.
Don’t be greedy: If your contract offers you sweeteners like training and sick pay, you’re an employee. Forget it.
A totally duck-free contract doesn’t exist: the IR35 assessment is done on the basis of likelihood. Some parts of your work may suggest employment, but as long as the majority of it doesn’t, you should be OK. Your contract needs to show that you have control, accept significant liability and risk, or have some right to substitute someone else’s work, but that’s always going to be a matter of degree.
When I was asked to train end users, for example, I couldn’t ask for the right to do it in pyjamas from my kitchen at 2am. Line managers are accountable to other people too. Even if they want to grant you the maximum contractual flexibility to avoid IR35, it’s often not in their political control, for good reasons. So be realistic.
Don’t take my word for it. See the bit above about getting professional help. Benjamin Franklin really did say this one: “Those that won't be counseled can't be helped.” ®