The First IR35 Letters Have Been Sent Out to IT Contractors

HMRC and the Government have taken the first steps in their campaign to bring in much more money from contractors with the sending out of the first batch of letters to contractors asking them to sit the IR35 Test and to prove that they are outside IR35.

A Review Panel of IR35 set up by the Government to look at IR35 again, recommended that IR35 should not be abolished, with one of the main reasons being that many contractors would leave their Umbrella Companies and go back into Personal Service Companies which was seen as a bad thing as the Government and HMRC get an average of around £10,000 a year less in tax and National Insurance contributions from contractors in Personal Service Companies compared to those in an Umbrella Company.

Indeed, the Government went further and said in the last Budget that they would ‘strengthen IR35’.

To this end, they set up three new Compliance Teams based in Salford, Croydon and Edinburgh and hired a total of 36 Compliance Officers for the new teams while they are cutting back Government staff elsewhere. It looks as if the Government see contractors as a means of increasing the tax take and see the IR35 tax as a means of doing so. IR35 was set up in 1999 to catch ‘disguised employees’, i.e. because of the spate of companies laying off employees on a Friday and starting them again in the Monday as contractors doing exactly the same job but providing tax advantages for both the company and the new ‘contractor’.

However, it caught many genuine contractors in its net.

Now it looks as if the Government are going to use this IR35 legislation to increase their tax take by classifying many genuine contractors as ‘disguised employees’ and forcing them to pay more tax. To this end they have, with the help of the Professional Contractors Group, devised a new IR35 Business Entity Test that contractors can take online to see if they are at high, medium or low risk of being caught by IR35.

Although the test is not definitive it appears to place virtually all contractors as being of high risk of being inside IR35. Although HMRC devised the test with the PCG, it was HMRC who devised the scoring system alone which appears to show most contractors to be at high risk.Now, the new Compliance Teams have sent out their first letters to contractors who use Personal Service Companies asking them to sit the test online and also asking them to send evidence to prove that they are at low risk of being caught by IR35.

If they can do that then they will not be investigated for a further 3 years but if they cannot, or they don’t reply (and they have only been given a month to reply), then the next step is likely to be a visit from the Compliance Team. If it is found that the contractor is inside of IR35 then this could result in the contractor having to pay tens of thousands of back tax. The end game here appears to be to scare contractors into getting out of Personal Service Companies and joining Umbrella Companies.

Do the maths.

There are currently 200,000 contractors using the Umbrella Company route and each of them pays £10,000 a year extra to HMRC and the Government. That’s £2bn extra a year that the Government didn’t get prior to 1999 when IR35 came in. According to the PCG there are 1.6m freelancers in the UK, most of whom would fail HMRC’s current IR35 Business entity Tests.That’s a very tempting sector for the Government and it doesn’t need any change in the legislation.Their main aim is not to catch contractors but to get high profile publicity in order to scare tens of thousands of contractors to take the Umbrella Company route rather than the Personal Service Company route.

Gerry McLaughlin is the CEO of UK IT Contractor umbrella company website www.ITContractor.com.

Dealing with Agencies – Getting the Best Rate Possible

Contractors are often duped by wily agencies and need to know what to look out for when dealing with agencies.

They can chose their Umbrella Company and their Contractor Mortgage company but they can seldom choose their agent as they tend to have to take whatever opening comes up from whatever agency have the requirement .

The biggest mistake that contractors make is in that the agency that they deal with is ‘their agent’. They imagine that they are like agents for actors who normally take 10% of what they can get from a client and so are motivated to get as much as they can for the actors that they serve.However, it is very different in the contractor / agent relationship. Indeed it is only contractors who call them agents as they tend to call themselves recruitment consultants.

Contractors in Umbrella Companies are sometimes better protected as they can ask the advice of their Umbrella Company on rates whereas Limited Company contractors are very much on their own when negotiating.Indeed, some Umbrella Companies may have relationships with particular agencies and may insist that their contractors get a certain percentage of the rate that the agency gets from the agency.

The first duty of recruitment consultants or agents is to maximise the returns for themselves and for their agencies. This is often to the detriment of contractors.As there is usually no set percentage of what the client will pay that should go to contractors and what should go to the agency, the agency will try and take as big a percentage as they can.

Contractors, especially new contractors, often find out that the agency is taking 50% or more of everything that they earn.Agents work on commission – so the less the contractor gets the better for them. Indeed, agents work on ascending scales of commission. In other words, if they hit certain targets then they might get 10% of what the agency gets. If they hit higher targets then they may make 20% or 30% or even 50% of what the agency gets.

Therefore it is in their interests to take as much as they can of what the client is paying and to leave the contractor with as little as possible of what the client will pay.Of course, more experienced contractors will be wise to this. However, agents, who are doing this kind of thing on a daily basis, are better attuned to this ‘game’ than the contractors, who only negotiate every few months at the most.

Most contractors make the mistake of looking at recruitment consultants as ‘their agents’ and let the agency tell contractors what their rate is going to be especially in their first few contracts. However, once they realise that the agency is a competitor for the money that the client will pay then their attitude changes and the contractor tries to dictate more the amount of money that goes to them from the client rather than the agency.

This advice may help new contractors to avoid this mistake and maximise their own returns from the work they do.

Gerry McLaughlin is the CEO of UK IT Contractor umbrella company website www.ITContractor.com.

5 Reasons For Contractors to Choose an Umbrella Company

Contractors normally operate in one of two ways, either by using a Limited Company or by being part of a Contractor Umbrella Company.

Here are reasons for a freelancer to operate using an Umbrella Company

1. The Contractor is caught by IR35.

If a contractor is caught by IR35 he or she is best served by being inside an Umbrella Company as they can claim a limited amount of expenses which they wouldn’t be allowed to do if they simply paid the IR35 tax.

2. The Contractor is not sure if he or she is caught by IR35

The taxman decides on a contract by contract basis whether a contractor is inside or outside of IR35. This means that the contractor may be inside for one contract and outside for the next contract. In this situation the contractor may want to operate through an Umbrella Company just to be on the safe side.

3. The Contractor wants to concentrate on Contracting

Umbrella Companies treat contractors as employees who can claim certain expenses. Many contractors don’t want to handle their own VAT and book keeping and are happy to pay someone else to take this responsibility off their hands so that they can concentrate on what they do best and that is contracting.

4. The Contractor doesn’t want years of an IR35 Tax Investigation

Many contractors who operate through Limited Companies have spent years under investigation for IR35 tax from HMRC. Many of them are then found to be outside IR35 but have wasted a lot of time and energy as well as worry in doing it. Others have been found to be inside of IR35 and have had to pay several years of back tax, interest and penalties sometimes amount to over £100,000. Many contractors don’t want the worry of having an IR35 tax investigation hanging over them

5. The Contractor can claim Expenses

Although the contractor can’t claim as many expenses as they would do if inside a Personal Service Company they can still claim a limited amount of expenses, for example, they can claim travel expenses, overnight expenses if they are staying away, pensions, memberships of professional organisations and contributions to charities which are all tax deductible.

It is every contractor’s choice depending on the way they operate. Are they ‘disguised employees’ or are they genuinely in business on their own account?

Do they want to manage their own affairs or do they want to concentrate on contracting and leave the admin to others?

Gerry McLaughlin is the CEO of UK IT Contractor umbrella companies website www.ITContractor.com.