IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Such workers are called ‘disguised employees’ by HMRC. If caught by IR35, they have to pay income tax and National Insurance Contributions as if they were employed.
As Licensed Insolvency Practitioners we only come across IR35 when there is an ongoing investigation by HMRC. The question we are asked by both the director and the Company’s accountant is: “What can we do if HMRC consider the Company to be in breach and serve a Determination on the Company?”
In most cases the Company remains solvent until such time as HMRC decide that a sum is due and serve a Determination on the Company. In the cases we have seen, the accountant has been adamant that the Company and its director have complied with the legislation. Corporation Tax, VAT and NIC are also up to date. There are usually enough funds in the Company’s account to pay any further VAT and Corporation Tax. The director needs to know what his/her options are once the Determination is served and a sum becomes due to HMRC.
The company could challenge HMRC. Some accountants recommend their clients take out insurance for this eventuality and members of bodies such as IPSE carry cover as part of their membership. Even with insurance many directors have no desire to fight. They consider the whole process stressful and just want to get on with their lives.
Where we have become involved in these situations we have given the director three options:-
- Raise the funds to pay the Determination.
- Offer HMRC whatever funds have been put to one side for VAT and Corporation Tax in full and final settlement of all outstanding tax, failing which the Company will have to go into liquidation.
- Put the company into Creditors Voluntary Liquidation.
At this point the director’s main concern is what personal liability they have and what is the likelihood of their being disqualified from acting as a director in the future if they put the Company into liquidation.
Where directors have used specialist Contractor Accountants, they should have availed themselves of an IR35 review that most of these accountants offer. How does this help? Where a director has taken professional advice, and followed it, the authorities will be less likely to embark on Disqualification Proceedings unless they have been reckless or negligent in their approach. From a Liquidator’s perspective they look for a director’s misfeasance, or wrong doing. Taking and following professional advice, even where HMRC decide against you, is going to greatly strengthen your hand. Remember it is the Company’s liability to HMRC not the director’s personal liability.
In our view it makes sense for the director of a Contractor Company to have an IR35 Review of every new contract and periodically thereafter if that contract continues for any significant time. Contractors need to realize that this is a complex area of tax/employment legislation and it is therefore prudent to seek appropriate advice and act upon it. Where you have done this you will minimise the impact of having to put your Company into Insolvent Liquidation, in the event HMRC make a determination against your Company.
Please telephone Lines Henry on free phone 0800 012 6649 to talk about your concerns