I’ve even seen the phrase ‘dash for cash’ bandied about as the Government seeks to plug the £158bn hole in the public finances with industry commentators expecting the number of HMRC investigations to mushroom in the coming months.

When you dig a little deeper into the story however, you might not be surprised to find out that many of those commenting are service providers to small businesses, selling products that offer potential customers protection or insurance in the event that they fall foul of HMRC.

ClearSky is also a supplier of services to small business and contractors in the UK, so we could be accused of having a vested interest in stories such as these, but for me, the old adage that says prevention is better than a cure really rings true here.

Small businesses that are correctly structured, managed properly and enjoy the professional advice of experts with experience in their market or industry, will have nothing to fear from any HMRC attention.

HMRC is one of the largest unsecured creditors to insolvent firms and the sudden targeting of illegal dividends is largely due to the fact that HMRC is concerned that unlawful dividends mean that company directors are not paying the full amount of tax that they should. The trend seems to have arisen from an increase in the number of insolvency cases due to the recent economic climate.

Figures from the Insolvency Service show that 2,169 directors of insolvent companies faced disqualification in the year to March 2010, a 17 per cent increase on the previous year. As part of the insolvency process, practitioners have been uncovering a number unlawful dividends or loans made to directors, hence HMRC’s attack on the practice.

 Another reason cited is the recent increase in the highest rate of income tax to 50 per cent, which came into effect in April this year. Some company directors are using illegal dividends in an attempt to avoid this.

With this in mind, I thought it might be useful to revisit what constitutes an illegal dividend and there are two ways that a dividend becomes unlawful.

The first is when the corresponding paperwork is incorrect, and this is another reason why contractors should always consider working with a specialist contractor accountant. We would always advise our contractors to consult us when drawing up the paperwork for their dividends.

The second reason that a dividend is considered illegal is unfortunately the most common and it is when their dividend is paid without the sufficient amount of profit in the business to substantiate the amount. The payment of a dividend such as this effectively means that the company is now trading insolvently and is therefore considered to be breaking the law. In cases such as this, HMRC has the power to reclassify the dividend as a director’s loan.

To avoid this, we recommend that the contractors who work with us only make the decision on how big a dividend to award shareholders once the company accounting information is up to date and the dividend can be accurately calculated on the most up to date amount of profit the business has generated. When we produce their quarterly management accounts we can also help them make an informed decision and we also provide a dividend calculator for our clients that will accurately calculate the dividend amount for them.

Blatant self promotion alert!

If I couldn’t recommend ClearSky’s own guides to IR35, I’d have egg on my face but I honestly do feel it’s worth a read. We’ve written this guide in what we hope are layman’s terms so that you don’t have to wade through pages of jargon.  It’s also deliberately short as it’s only meant to give you an overview, not specific advice. To get a proper assessment of your IR35 status, it’s always best to speak to a qualified person who can get under the skin of your specific circumstances.

Contractor UK’s ‘Insider’s Guide to IR35′ is another decent starting point for contractors wondering what IR35 is all about and whether they’re affected by it. Put together with assistance from former tax inspector Ray McMahon, the 12 pages are well organised and concise if not a little formal.

Contractor Calculator has a very useful contract reviewing facility geared towards identifying IR35 relevance, as well as a free IR35 report for download that covers the genesis of the legislation and practicalities around it. We’d love to see Contractor Calculator develop a true IR35 calculator as the one on the site will only give you a topline idea of your earnings if you are caught by the legislation or not.

Contract Eye is an excellent website that always publishes useful information in user friendly chunks. As well as overviews of the legislation and how to check if your contract is compliant, there’s an interesting review of the famous Dragonfly case which helps put all the legalese into context and brings home the frightening realities of falling foul of the law.

Great Expectations - For those who want a more comprehensive guide to all things IR35 (as well as a great deal more on flexible working in the UK), Great Expectations, written by Bel Grant, a leading commentator on flexible working, is a must read. IR35 section highlights include: setting out the differences between a ‘deliverable’ and a ’role’, lots of anecdotal workplace examples of likely inside and outside IR35 work, a borderline IR35 investigation case study with a happy ending – eventually, and the main risk factors to being caught by IR35.  Bel’s on-screen guidebook is available at Flexible Working Expert. Bel has written about freelancing in the UK for a number of national newspapers as well as business and trade titles and websites, as well as having firsthand experience of flexible working herself.

How do our competition fare?

Various accountancy firms have produced IR35 guides specifically for contractor clients. SJD Accountancy’s ‘Plain English IR35 Advice’ is worth looking at, although cheekily they will expect you to register your details with them first. Holdsworth & Co’s information is provided in a similar vein in a 30 page document that includes a section on umbrella companies but also requires you to email them first. Finally, Virtue Accounting also provides relevant information in a different format which includes a user rating facility.

Business Link has a useful ‘one stop shop’ page around IR35 which includes a guide to the legislation, their IR35 helpline number and related events – although when I checked the events page there was nothing specifically relating to IR35, which was disappointing.

Smallbusiness.co.uk have a disappointingly static outline guide that doesn’t seem to have been updated since 2006 – and the title (Are You an IR35 Tax Case?) sounds somewhat pathologising!

Finally, no review of information sources could ignore HM Revenue & Customs which naturally has its own IR35 guide  and helpful tools such as a ‘deemed relevance’ calculator. This is the first and last word on the detail of the legislation but if you’re anything like me, you’ll find the formal language difficult to wade through.  I felt like I needed a translator at times, but maybe that says more about me!

So as you can see, the information is out there. Some of it fairly lightweight, some of it totally detailed and sometimes bamboozling. If you have any worries about IR35, an hour or two spent perusing the better guides will be time well spent but you should expect your accountant to be able to offer expert, tailored advice after a quick conversation too.  Let me know if you spot any other resources that you feel I should add to this list.

Current unemployment figures are between 9 – 13% and are likely to rise to almost 3 million by 2012. With some 250,000 people choosing part-time work to keep a steady income rather than face no work at all; there has been a huge change in the way we work. Flexible working patterns such as a 4 day week and taking a 20% pay cut have been introduced to avoid dramatic job cuts.

So, although the outlook for the economy is looking grim, now may be the perfect time to use some of that entrepreneurial spirit of yours and go it alone. Business specialist, Doug Richard, who is better known for his stint on Dragon’s Den, claims that new business start-up costs are lower now than in the last 20 years. He highlights that the internet has brought costs down and the increasing power of social media such as Facebook and Twitter to get the message out.

The North West (where one of our offices is), and Manchester in particular, has seen a 14% increase in small businesses starting up in the last year. There are a number of measures in the recent budget designed to promote small ventures and new start-ups, including tax reliefs. The government hope to create 2.5 million jobs in order to cover the loss from the public sector. The cuts made in the public sector may allow room for contractors to step in and take over the critical projects that need finishing.

In the UK, 6% of us now run our own business. If any of you are wanting to join that 6%, whether it be because you want to take home more money, you want to make a permanent career out of contracting or maybe just like the idea of being in control of your own limited company then now may be your chance. As specialist contractor accountants, at ClearSky we are here to help you to go it alone. So, if any of you need some more advice on setting up your own Limited Company; here’s the link to our useful guide “The Survivor’s Guide to Contracting”.  

The focus was on the creative, media and PR industries but a lot of the questions, particularly the accounting type questions which I was brought in to address, had a similar theme to a lot of the queries we see on the main contractors forums every week and relate to day one of being a contractor; how do I set myself up and what is the best way to manage my finances, making sure I don’t fall foul of the tax man?

It’s clear from the discussions I see, and take part in, that there are a lot of very experienced contractors out there who have a very firm grasp of accountancy for their business. However, there are also a fair number of ‘bar room’ experts who don’t always offer the most accurate advice, or pass on second hand advice they’ve picked up ‘from a mate.’

As per the advice I would always give to any contractor looking to set up their own limited company, do your research, make best use of all the online guides, and its always best to talk to a professional, specialist contractor accountant.

You may think that good advice can be quite costly, but it won’t be as costly to your business as bad advice.

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The purpose of the website is to give the British electorate the opportunity to feedback to government on which laws and legislations they would like to see changed or removed all together.

Some commentators and opposition politicians have approached the ‘Your freedom’ website with a great deal of cynicism but for those of us in the contracting world, in which IR35 has loomed large for over a decade, it could be the best chance yet of having IR35 abolished, or at the very least simplified with added clarity!

The PCG has been campaigning for some time now to have IR35 abolished, and it’s fair to say the results have been mixed. I’ve spoken about the legislation being a focus point of a lot of politicking during the last election and there has been conflicting messages about IR35’s future in the press in recent weeks.

What can’t be denied though is the fact that contractors would prefer to see IR35 abolished and replaced with much clearer and transparent legislation.

Well if that is what you want, I believe the Your Freedom website is the best opportunity yet for us as an industry to speak out and we should be mobilizing to do so!

The PCG currently has around 20,000 members. The FCSA, of which our sister company Parasol is a founding member, looks after the collective interests of over 50,000 contractors, and if encouraged to do so, that is a lot of voices calling for IR35 to be abolished, something that the government will be forced to pay attention to.

At the time of writing there are already of 10 separate threads on the Your Freedom website discussing the abolition or replacement of IR35, citing its debilitating effect on small business and enterprise and bemoaning the relatively small tax yield it has produced in return. We will be adding our voice to that list and encouraging the contractors, agencies and business groups we work with to do the same.

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Whilst we’re all undoubtedly going to feel some pain on a personal level, the budget seemed to generally favour small business.  The proposed reductions to corporation tax will mean that it will become cheaper for contractors and freelancers to operate via their own limited company and net income will increase as a result.  This is improved further when you consider the increase in VAT to 20% from 4th January 2011.

A lot of our clients work in the public sector and will inevitably feel nervous about the impact of such brutal cuts to departmental budgets. However, a recruitment freeze on permanent appointments in the public sector could lead to an increase in contract work as freelancers (without their expensive public sector pensions!) are bought in to complete critical projects.  We can but hope.

We’ve just published our full guide to the emergency budget. If you’d like to understand how it will affect you and your business, download your copy below.

ClearSky Accounting emergency budget guide

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.”