In this article, former Inland Revenue auditor and Tax
Inspector Ray McMahon, reveals his secrets. The opinions expressed
are Ray's, not OUT-LAW.COM's.
If treated as disguised employees of another business, the
Revenue will request additional tax and National Insurance
Contributions (
NIC
) from the consultants or the client
business under
PAYE
(Pay As You Earn).
As an ex-Inland Revenue auditor and Tax Inspector (with over 20
years tax experience) my job was to "catch" these businesses and
consultants. But now I am a self-employed Tax Consultant my job is
to help these consultants and businesses when dealing with the
Inland Revenue. (A case of gamekeeper turned poacher!). In an
average year I would "get a result" in over 80% of all businesses
inspected and would obtain between £250,000 - £500,000 additional
tax,
NIC
, interest and penalties for the Inland
Revenue.
Many businesses argue that the individuals declare their own tax
and
NIC
under Self-Assessment. However, if the
individual has not declared the amounts (maybe because his accounts
are not due yet) the Inland Revenue will seek all tax and
NIC
(approximately 45% - 63% of all invoiced amounts)
before adding interest and penalties. If the amounts have already
been declared by the individual, the Inland Revenue will often
still ask the client business for Employers
NIC
at the
rate of 12.8% (2003/2004 rate) and additional interest and
penalties. They may consider charging the consultant's own business
(i.e. a "one man band company") these amounts. Either way, the
Inland Revenue will generally go back as much as six years and
estimate (if necessary) a settlement figure.
There are many areas the Inland Revenue look for. For example,
if the individual has business cards for the client business, has
his own office on the business premises, works every week for the
same business, is paid an hourly rate, takes instructions from an
employee of the business or is provided with a company car. All
these point towards the individual being an employee of the
business.
Now that I work for myself, people ask how they can avoid these
potential issues. The easiest way is to review the work of the
individual and prepare a working contract (not a verbal contract
which the Inland Revenue can easily challenge).
There is no standard contract or a single pointer towards
employment or self-employment. The only way is to review the
working practices and conditions and to use the tax cases over the
years to arrive at the correct decision. The Inland Revenue
questionnaire to determine status of individuals comprises more
than 85 questions! If you leave it for the Inland Revenue auditor
or Tax Inspector to make the decision, then generally they will
argue that the individuals are employees as they get extra credit
for "finding these errors". By challenging the Inland Revenue and
using tax cases, a case can be put to the Inland Revenue that the
individuals are genuinely self-employed and can continue to pay
their own tax and
NIC
under Self Assessment.
Overall the best way to avoid
IR35
action is to
ensure you only use genuinely self employed consultants.
By Ray McMahon
