Don’t get Irate about IR35!

Almost 100,000 freelance professionals and contract workers in the North West have been hit by new red tape as the government acts on powers to demand additional taxation and National Insurance, with penalties and interest payments backdated up to six years.

The measures were introduced by Gordon Brown to maximise the effectiveness of the controversial IR35 legislation, introduced in 2000, which the government hoped would raise an extra 220 million per year. This was to be achieved by closing loopholes relating to income tax and National Insurance contributions paid by freelance professionals on long-term contracts.

IR35 has become a dirty term to many of the freelance professionals who make up 3.15% of the North West’s total workforce, conjuring up images of grasping government, eager to get its hands on as much of our hard-earned cash as it humanly - and legally - can. The only problem for the Inland Revenue is that IR35 has not forced as many people into direct employment as had been envisaged.

Celine Macdonald-Matti is North West branch manager for Freelance Euro, an accountancy firm providing specialist services to freelance and contracting professionals.

She says: The IR35 legislation is notoriously complex, but with careful planning it is possible to understand the legislation and work within the law to maximise personal benefits and minimise taxation.

In essence, the government wanted to make sure that nobody was taking advantage of the benefits of incorporation, when they could be deemed to be directly employed by the company they were working for.

The crucial element is the difference between employment and self-employment, which sounds simple enough, until you realise that no clear-cut guidelines are issued by the government.

The rules are interpreted on the outcome of individual legal disputes, which then pass into case law. In the recent case of Mr Bill Hood, an oil rig designer from the North East, it was ruled that he could not pay himself a small salary from his personal company - Usetech Ltd - and distribute the rest of its assets as he saw fit, because he fell foul of the regulations primarily due to the amount of control shown over the services her offered.

Many people fall foul of IR35 simply because they do not understand its full implications, comments Celine. Also, many parts of the legislation are still subject to ongoing case review which complicates matters further. Key factors in determining compliance are whether you are the only person permitted to fulfil the designated role and whether the client controls all aspects of the service you provide.

If you are judged by the Inland Revenue to have been a ’disguised employee’ under the IR35 regulations, you will have to pay more tax, but will not receive the usual benefits of employment, such as a pension.

So what’s the answer? adds Celine, Well, you can either give up on self-employment or seek advice from someone who knows all about IR35. A thorough assessment of your contractual position and working practices can help to clarify the matter and protect you from Inland Revenue investigation. Once this is complete, you can then take out insurance against the risks of an investigation for total reassurance.

A severe downside of IR35 is its failure to align employment status with taxation status, which encourages employers to recruit workers through an agency so that employment risks are minimised.

In the 2004 budget, Gordon Brown failed to announce the clarification of employment and self-employment which many had been hoping for, while also removing some of the tax advantages for companies with annual profits of less than 50,000. The impact of this on the number of self-employed individuals choosing to form their own companies is clear, with just 46,794 new businesses registered at Companies House between March 21 and May 2 this year, compared to 57,264 over the same period in 2003, a fall of 18 percent.

Having your own company is not quite so advantageous as it used to be, although some benefits do remain, concludes Celine, You will still pay less tax overall and have more control over your own workload, choosing which contracts you wish to accept. You also qualify for tax relief on business expenses and company car leasing terms.

Basically, the average individual on around 350 per day can save around 4-5,000 per year by registering his or her own company, so provided you ensure that you qualify with IR35, there are still clear benefits to self-employment.

For further information on IR35 and services offered by Freelance Euro, you can call Celine Macdonald-Matti on (0161) 374 4777 or visit