Now I know this may sound like Chicken Little / Chicken Licken claiming the Sky is Falling but I’ve had years of experience from moderating the HMRC Enquiries forum which tells me not to trust anyone’s reassurance (be it an IR35 expert or HMRC) when money is involved.
Awareness, not guidance
Make sure that any contract you are about to take is definitely outside, and not just something the agency has advertised to get contractors to take it.
Here are some tips for ensuring that your contract is definitely outside IR35:
Top 10 tips to make your contract outside IR35 (contractoruk.com)
Background
There are two types of Outside contracts.
The old style IR35 contracts where you are responsible for assessing IR35 status still exist. The typical situation for this type of contract is when the client is a small company (explained in Chapter 8 of ITEPA):
Chapter 8 - Income Tax (Earnings and Pensions) Act 2003 (legislation.gov.uk)
A small company is defined as having:
Annual net turnover of less than £10.2 million
Balance sheet totalling less than £5.1 million
Less than 50 employees
A small company is not liable for any unpaid tax and the determination remains with the contractor rather than the client. In this case, there is no Status Determination Statement from the end client.
[Note – HMRC wants to remove the small company exemption unless MPs can stop it.]
The other, less common, situation where the old style IR35 applies is when the end client is overseas and they have no “UK connection”, such as a UK permanent establishment (e.g., a branch office). As with the small company exemption, a fully overseas end client is not liable for any unpaid tax and the IR35 determination remains with the contractor.
And the new post April 2021 version where the client does not fall into the small company category (explained in Chapter 10 of the ITEPA)
Chapter 10 - Income Tax (Earnings and Pensions) Act 2003 (legislation.gov.uk)
Other companies ARE liable for any unpaid tax and the determination moves to them.
Why this post?
Because with Chapter 10 determinations the contractor isn’t responsible for the determination, instead the end client is.
But the end client isn’t responsible for the tax bill that the determination may result in, which opens up various means by which someone else (potentially you, the contractor) will be left paying the bill.
If / when an outside determination is challenged by HMRC (and HMRC wins), it is not the end client who is responsible to pay the tax due but the “Fee Payer” in the first instance. Typically, that “Fee Payer” is the agency who paid your limited company and they are not going to be in a position to pay what is likely to be a very large tax bill. Which means that the “Fee Payer” will in most cases be looking for someone else to pay the bill and could be advised by HMRC to claw-back the tax from the contractor. This could happen months later (or potentially years later as HMRC gets around to the case). Where the contract between your company and the Fee Payer includes claw-back clauses (that pass liability for unpaid taxes down to your company or even you personally), the risk increases.
This is because HMRC has told a long-term poster (posing as a “Fee Payer” agency) on multiple occasions that were this to occur their advice would be to claw-back the money from the contractor.
And this means…?
Because I have been moderating the HMRC Scheme Enquiries forum for years, I can see the way the wind is blowing for this.
Individual retrospective* tax collection is only a matter of time, in my view.
(*HMRC will say that it isn’t retrospective because they made the IR35 changes in 2021 – anything before this time isn't included – of course it IS retrospective for those individuals caught in specific contracts.)
So what do you advise?
I am not advising anything. I am not an accountant. I have posted this to make sure that you are aware of what might be coming down the track.
Personally, I will only be taking outside IR35 contracts from small companies, and I will be keeping that decision under review.
It is for you and your own circumstances to decide what to do next, but I repeat:
Make sure that any contract you are about to take is definitely outside, and not just something the agency has advertised to get contractors to take it.
An IR35 warning to businesses: As HMRC’s ‘grace period’
comes to a close, IR35 assessments become more complex than ever - Lexology
IR35: NAO off-payroll report ‘shows extending rules to small companies would be madness’ (contractoruk.com)
Tax - Inside or Outside - Contractor UK Bulletin Board
https://forums.contractoruk.com/accounting-legal/145667-inside-outside-tax-turning-into-another-loan-charge-debacle.html
https://www.contractoruk.com/news/00...e_madness.html
(Thanks to eek and jamesbrown for reviewing and improving.)
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