IR35 is spoken of in hushed tones by contractors and freelancers. It has taken on something of a mythical aura; a rule that can ruin self-employed individuals with a single investigation and that has, sadly, already bankrupted many.
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IR35 was developed by the government to root out ‘disguised employment’. It was supposed to prevent tax dodging by those who are, to all intents and purposes, employed but who use the trappings of self-employment to lower their tax bills. The legislation, though, has caught many genuine freelancers and contractors in its net, and has had a dramatic financial impact – reducing take-home pay for some by 25%, and landing others with huge retrospective tax bills.
Facing an Investigation
But IR35 does not need to be a financial death sentence. An increasing number of genuinely self-employed individuals have been able to fight investigations by the taxman, and win. This case study concerns an IT consultant, based in London, who was recently the subject of an IR35 investigation.
“I set up a limited company, and I put all of my payments through that,” he said. “I paid myself through dividends, rather than drawing a salary. If I had taken the cash out as salary, I would have ended up paying much, much more tax.”
Having been a contractor for over a decade, providing services to a wide range of clients, the man eventually became the subject of an investigation under IR35. “Although I’ve worked for lots of people, I have had a couple of clients that have provided the bulk of my income, and taken up most of my working time, over the last few years. HRMC apparently decided that I was actually an employee of one of these companies.”
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During an investigation, HMRC consider whether a contract of employment could be said to exist between the man and his client. In order to pass the inspection, the man had to prove that no such agreement was in place. Clearly no contract of this sort existed on paper. Instead, the man had to prove that his working conditions were such that he could be deemed a Genuine Contractor.
“I had joined the Professional Contractors’ Group (PCG) a few years back, and had thought little of it. But as soon as the investigation was launched I got in touch, and they turned out to be my secret weapon.”
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Professional Help
The PCG help their members fight IR35 investigations, and have a remarkably high success rate. They used a range of evidence to demonstrate that the man was, in fact, a contractor. They drew on email exchanges between him and the client showing that the man frequently worked from home, and found a note stating that the man could provide a substitute in the event that he was unable to work.
Crucially, the PCG also collated all of the dividend receipts and minutes that the man had drawn up when taking cash out of the company. These are crucial in proving that this money should not be treated as conventional income.
“Although I had the benefit of the PCG, most genuine contractors should be able to fight an investigation on their own,” the man said. “The key is to show that you have control over your working arrangements. I would have been in trouble if I couldn’t show that I was free to work from home.”
If you face an IR35 investigation, while it is possible to go it alone you should seriously consider seeking advice from an accountant or solicitor – or, better still, from a specialist group like the PCG.
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