Article First appeared on www.itcontractor.com on Monday, 7th June 2010

Eleven years on since its introduction, IR35 is still rarely out of the headlines and remains a huge bone of contention for contractors operating as a limited company and their service providers. The future of the legislation remains unclear, despite the new Government’s commitment to a review with the aim of simplifying the rules. However, Derek Kelly, managing director of ClearSky Accounting, warns the contracting world not to expect IR35 to be abolished but calls on the Government for clarification.

“We believe that the priority for any review of IR35 needs to be about certainty,” said Derek. “As the legislation stands IR35 is subjective, and as a result, different views by different parties can be reached using the same set of facts.

“IT contractors are a savvy bunch and will be well aware of the impact the huge budget deficit has on the UK economy and how the new Government will need to cut costs and generate additional tax income to address it. What they ask for in return though is certainty about if and when they face a tax bill and for how much. If the legislation was clear and could provide a series of specific tests that then produced a balanced answer then taxpayers, advisors and HMRC would save a lot of time, admin and expense.”

Despite IR35 becoming something of a political football during the recent election campaign, with both the Tories and Lib Dems using it to engage with contractors, perhaps more significant for contractors and freelance workers in the UK have been the results of two high profile cases heard in the High Court.

The impact the well publicised Larkstar Data and Dragonfly Consulting cases will have on how HMRC inspectors determine IR35 status remains to be seen. However, the fact that HMRC has updated its Employment Status Manual to include case law from both these ‘victories’ in the High Court clearly demonstrates that, despite the relatively miniscule tax yield (particularly from the Larkstar case), HMRC believes that IR35 is not just about the money and will go the distance in order to protect the legislation.

Derek Kelly added: “HMRC has now won all four of the IR35 cases heard in the High Court, as well as ten out of 15 cases brought before The Special Commissioners, not a bad record at all, and a clear sign that in the eyes of Government and the law, IR35 is working.

“What this means for contractors is that if they do not take reasonable care to ensure their IR35 status is fully examined and referenced against case law, should they be caught in HMRC’s ever expanding net, the outcome is likely to be a hefty tax bill and this is unlikely to change whatever form a simplified IR35 may take.

“It also means that taking proper advice from a specialist contrator accountant when it comes to IR35 should remain an imperative for any contractor operating as a limited company.”

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Tags: ClearSky, contractor, HMRC, IR35, IR35 advice, IR35 legislation, uk government