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New draconian IR35 rules – PCG horrified Author Gerry McLaughlin Date 4/1/2004 Article: IR35 Review The Chancellor has published his long awaited review of the IR35 and small businesses. He has plugged many of the gaps, and tax avoiding contractors could now risk being banned from their profession for up to two years. The Chancellor, Gordon Brown, appears to have lost patience with the myriad ways of getting round IR35. He has published new rules which will be implemented immediately. These include:- 1. Substitution Limited companies can only claim the right of substitution if they have actually invoked it during a contract. Otherwise it will be deemed that there is no right of substitution. The only exception would be if the substitute was part of the Highly Skilled Migrant Programme. 2. Same Facilities If contractors use the same facilities as permanent employees, i.e. the same office, the same client / server set up or even the same toilets as employees then they will be deemed to be disguised employees. 3. Badges If contractors wear Security Badges for the full period where they work at a client’s site then it will be deemed that they are, in fact, disguised employees of that company whether or not contractors have different badges from employees. 4. Workplace If contractors spend more than half of a contract period working at their client’s site then that would, in future, be a pointer to employee status for the contractor. There would be an exception if the contractor was part of the Highly Skilled Migrant Programme or was working through a Fast Track Visa. Tax Avoidance The Chancellor has now classed as tax avoidance:- 1. Contractors who get their agency contracts changed to take themselves out of IR35. If the contractor’s contract with the agency is different from the agency’s standard contract, with the purpose of taking it outside IR35, then that is now classified as a tax avoidance offence. 2. Membership of organisations specifically set up to help contractors avoid IR35 will now incur tax avoidance penalties. Directors of such organisations could now be charged under the Anti-Racketeering Laws (1973) 3. Deliberately taking workplace related steps to differentiate between a contractor and an employee with the sole purpose of avoiding IR35 tax will be classed as tax avoidance and will incur penalties. Penalties The Chancellor has introduced penalties for contractors who he deems as avoiding IR35 tax. The penalties are as follows:- 1. For a first offence there will be a fine of up to £5,000 plus £200 for each day of the contract where deliberate tax avoidance has occurred 2. For persistent offenders the Inland Revenue now have the powers to ban contractors from working as contractors in their chosen profession for a period of up to 2 years. In exceptional circumstances the IR will have the power to ban contractors sine die from being contractors 3. Prison sentences of up to five years for those involved in what the Chancellor sees as fraud, i.e. having a contract that doesn’t match the actual working practices used by the contractor in the contract, with the deliberate purpose of avoiding IR35 taxation. This penalty will be under existing Fraud legislation. According to Richard Robson of the Professional Contractors Group:- “These are the most draconian powers that any Chancellor has taken upon himself. He doesn’t appear to be able to see the line between genuine tax avoidance and criminal activity. Many contractors could be criminalised just for trying to take themselves outside of IR35. It looks as if just about everyone will be caught out now. This will kill contracting. When this legislation is implemented it means, theoretically, that myself and my fellow PCG directors could do time simply for helping contractors to put themselves beyond IR35. That would be a tragedy”. According to Paymaster General, Don Primarosa:- “A lot of contractors, especially in IT, thought that they would get round our IR35 legislation. However, we are determined to keep changing the rules until all disguised employees are caught by it, although all genuine small businesses, which most IT limited companies quite clearly are not, will not be affected by it”. The Professional Contractors Group will be organising a March on Whitehall on April 17th to protest at these measures. To find out more details of the March email PCG March   Umbrella Companies | Personal Service Companies Company Set Up | Foreign Exchange | Contractor Insurance | Contract Search | IT Contract | Contractor Mortgage | Contractor Pensions | IR35 | Umbrella Company IR35 Advice News Jobs Money Forum

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