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IR35 – Will you be caught out?

You might have heard about Christa Ackroyd in the news recently. The former BBC Look North presenter is facing a tax bill of up to £420,000 after losing a dispute with HMRC, a judgement that could potentially affect others working in similar conditions.

Ms Ackroyd had been working through her limited company as a BBC presenter, a standard practice when she was taken on in 2001 and employed under two fixed term contracts between the BBC and her personal service company, Christa Ackroyd Media Ltd (CAM). However, a tax tribunal decided that her income should be taxed under the IR35 rules.

These rules are intended to remove the tax advantages of providing services through a limited company in cases where, absent the insertion of the company as an intermediary between the contractor and their end client, the contractor’s relationship with their client would have been one of employment.

IR35 removes the tax advantages of using a limited company as an intermediary by taxing the income received by the company as employment income and, worse still, requires the contractor to pay the employer’s NIC through their limited company. In Ms Ackroyd’s case this will cost her over £400,000. But it gets worse, as whilst for tax purposes she is counted as a “deemed employee”, she will nonetheless have absolutely no employment rights whatsoever.

Most of us are better at feeling sorry for ourselves than for others, but Ms Ackroyd’s fate could soon be shared by many more people including you or the people your business contracts with. The public sector “reforms” in April 2017 changed the compliance burden so that instead of the contractor assessing whether he or she fell within IR35 the public-sector body contracting with him/her had to undertake this. What’s more, if the public-sector body got things wrong it would be they, not the contractor’s intermediary company, that would be liable for any additional tax that became due. There are some suggestions that we may see the same “reforms” applied to the private sector from as early as April 2019.

So, what are the lessons from the 2017 extension of the rules that should be learnt?

Well, the crucial learning point is that many public-sector bodies struggled to comply with the regime. This is because the new regime came in so quickly they had little time to prepare. The fear of exposure to new tax liabilities made may public sector bodies risk averse and so there was often not a case by case scrutiny of individual circumstances, but a generic approach was adopted where contractors were asked to operate as though IR35 applied just to be on the safe side.

As a result, many contractors paid a lot more tax, and were very unhappy about it. Many contractors stopped wanting to work for public sector bodies, thus making it harder for these entities to fulfil their goals and meet their objectives.

So, don’t get caught out. Understand early on how your business would be affected by the extension of these rules to the private sector. Plan for it. Talk to your contractors and reflect on and discuss whether there is a better model on which to work with them.

Always ensure you consult a trusted, professional source. Ecovis is a leading firm of ICAEW Chartered Accountants, and a source of financial and business advice to entrepreneurs, small and medium-sized businesses. As a member of the ICAEW Business Advice Service, we offer SMEs and start-ups an initial meeting at no charge to discuss business needs.

Chris Sparkes

Tax Partner
T: +44 (0) 7789 397 660 
E: chris.sparkes@ecovis.co.uk