IR35

If you follow the news around IR35, you’ll know that recently BBC Breakfast star Charlie Stayt has become the latest famous face to battle HMRC over “unpaid tax”.

With celebrities including Lorraine Kelly, Gary Lineker and Kaye Adams already winning their own fights against the taxman, he’s not the first and certainly won’t be the last British broadcaster to do so, with an increasing number of high-profile TV presenters being chased by HMRC over thousands, if not millions, of pounds. With lengthy legal battles taking place in the public eye, it casts a spotlight over the IR35 rules and regulations once again.

HMRC launched their case after it emerged Charlie Stayt and his wife, Annie Breckell, had been served a bankruptcy petition over their firm, Stayt Limited. Describing itself as involved in ‘television programming and broadcasting activities’, his company lists both Annie and Charlie as directors, as well as Hogbens Dunphy Secretaries, an accountancy firm based in London, and was £6,409 in debt according to accounts filed in December.

With HMRC pursuing high profile TV personalities for huge amounts of tax, it currently looks unclear as to what Charlie Stayt’s tax bill relates to. With him being an employee of the BBC for a number of years, it’s unclear whether this is related to IR35 or not, however his battle with HMRC follows the trend.

Disguised Employees and IR35 Rules

As the government clamps down on tax avoidance, IR35 legislation is becoming more and more talked about due to reports featuring these famous faces. IR35 is designed to crack down on ‘disguised employees’, otherwise known as contractors or freelancers who charge for their services via a limited company.

Presenters often operate as freelancers, and HMRC is investigating whether they are genuinely self-employed, or should be operating as an employee of the company they are working for, i.e. BBC, ITV etc. If they are operating as an employee, then they would be subject to employment taxes – not freelance taxes, that are normally paid via self-assessment.

Although many contractors operate in a compliant manner, especially those that work with an accountant to navigate their taxes, targeting these high-profile names casts a warning to those who do not. Some, who do abuse the IR35 rules, use it as a loophole to dodge taxes.

What doesn’t help those that are contractors or freelancers are how the IR35 rules are so complex and ambiguous. The legislation can often be misapplied, which HMRC recognises.

What are the latest IR35 rules?

In April, IR35 rules changed, addressing overpayments to HMRC through incorrect worker status determinations. Overall, the changes could make employing contractors less risky, which could have a major impact on medium and large businesses.

When IR35 was first introduced, it was intended to make the employer, rather than the contractor, liable for any unpaid taxes. However, this allowed HMRC to recover more tax than due by forcing businesses to put all contractors on payroll.

In April 2023, changes were proposed, addressing these overpayments. The updated legislation was introduced from 6th April this year.

Here’s an overview of these changes and what they mean for you:

–          Introduction of the Set-off Mechanism

The introduction of a set-off mechanism to address the issue of double taxation was the most anticipated change. It allows taxes already paid by a contractor’s limited company, such as corporation tax and National Insurance Contributions, to be offset against the tax liabilities due when HMRC reclassifies a contract as falling inside IR35.

–          Retrospective Application

The new rules apply to all contracts going forward from April 2024 but will also be available for tax arrears dating back to April 2017. This means that if a settlement is reached after the new rules come into effect, contractors and end clients can benefit from the set-off mechanism for past misclassifications​.

–          Pause on Compliance Checks

HMRC has allowed some compliance checks to be paused. If a case meets certain conditions taxpayers can pause settlements until after the new rules are in place.

Despite these new provisions, it is crucial for businesses to maintain their compliance processes:

–          Status Determination Statements

Organisations must continue to issue an SDS for each contractor, determining whether they fall inside or outside IR35.

–          Due Diligence with Umbrella Companies

It’s essential for businesses to perform appropriate due diligence checks due to the complexities of umbrella companies. This ensures compliance and avoids facilitating tax evasion.

–          Adherence to CIS Rules

For those in the construction industry, the Construction Industry Scheme rules take precedence, ensuring they align with the off-payroll working rules​.

What happens if my business does not follow the IR35 rules?

Non-compliance with IR35 regulations can lead to severe penalties, including:

–          Financial Penalties

Depending on the nature and reason for the error in status determination, penalties can range from 30% to 100% of the unpaid tax, whether they scenario was careless or deliberate.

–          Legal Costs

Businesses can face substantial legal costs due to prolonged investigations by HMRC.

–          Reputation

Beyond financial repercussions, failing to comply with IR35 rules can result in long-term damage to an organisation’s reputation.

Determining IR35 Status

There are two possible classifications which can be determined when undertaking an IR35 assessment:

Inside IR35

It’s not your business, but the contracts that can be inside IR35. If you get the same benefits and have the same responsibilities as a permanent employee, and are managed like a permanent employee, this is a strong indicator that you’re operating on a contract inside IR35.

You must pay the same National Insurance Contributions and income tax that would be paid by a permanent employee.

Outside IR35

If you’re a contractor, freelancer or consultant working through and being paid by your own limited company, then it is likely that your contracts will fall outside IR35.

Your client will pay your business a gross amount and you can choose how you structure your income. You have the responsibility for paying the correct National Insurance Contributions and tax rather than your client as your NIC and tax is not paid through PAYE by your end client.

Determining your status

Control

If you are under the direct control and supervision of your client, it is likely that you’d be classed as inside IR35. If your client controls your working hours, the location you work from and input into how the service is delivered, you will be deemed as employed by them, and therefore operating inside IR35.

The Right of Substitution

If you can provide a substitute to work on the contract if you’re unable to work, this is an indicator that you are outside IR35. If the service cannot be delivered by an employee of your business other than yourself, it is likely you would be inside IR35.

Mutuality of Obligation

If there is an obligation for you to continue working for the employer after the current contract expires, this is likely inside IR35. A self-employed contractor will work on a specific project with start and end dates that they’ve been contracted to do.

Working with an IR35 expert accountant

Operating outside of IR35 gives limited company contractors a great foundation to build a rewarding career. Working with a contractor accountant like Gorilla is paramount to financial success, ensuring your status and tax contributions are correct.

With Gorilla you’ll work with your own dedicated accountant, ensuring your finances are expertly handled so you can focus on your work while we take care of your accounting.

With our limited company accounting package, you also benefit from full access to FreeAgent accounting software and a guaranteed same working day response to your queries thanks to our Client Service Guarantee.

We understand that it’s not always easy to determine the IR35 status of your contracts which is why we’ve partnered with industry experts Qdos to provide expert contract reviews. If you have any queries about IR35 and would like advice or if you’d like to know more about our limited company accountancy package, please call 0330 024 0406, fill in our instant quote form or request a callback.

 

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