City accountants warn engineers still cannot tell if IR35 applies

City accountancy firms have warned that many engineers are still finding it difficult to determine whether or not they fall under the IR35 tax regime, reports Electronics Times

The warning suggests there has been little progress since April's judicial review of IR35. It upheld IR35 but also said some Revenue documentation, designed to show how it interprets the law, was unhelpful and lacked clarity.

The warnings come despite the Revenue telling Electronics Times that it reviewed the review judge's remarks in redrafting the documents. The continued muddle could leave engineers facing a cash crunch as they pay more in contributions than they may need to.

IR35 came into force to clamp down on alleged tax avoidance by one-man service companies. It requires extra PAYE and NI contributions from contractors to counteract instances where service companies pay the employee only a small salary, offering most of the income in less highly taxed dividend payments.

The law has resulted in some workers paying up to 50% more tax than they did before IR35 was introduced.

Anne Redston, a tax partner at Ernst & Young, said, in particular, that the Inland Revenue is taking too long to perform the service that checks whether or not a contract needs to be treated under IR35.

"Further work needs to be done to help people understand where the line is, and to speed up the clearance process," she said. "If everyone used the service, the Revenue couldn't cope."

She advocates that workers change the way they do business to more easily show that IR35 does not apply to them.

"Most people have to deal with a fairly complicated area of tax law," she said. "People need to educate themselves, take advice from someone or get Revenue clearance. Doing nothing isn't an option."

The main conditions for contracts to be excluded from IR35 are that the personal services company:

• runs the risk of making a loss;

• can send substitute workers to carry out the contract;

• supplies its own equipment;

• is paid on invoice; and

• receives no holiday or sick pay.

John Whiting, tax partner at PricewaterhouseCoopers, said: "I don't think it is easy for people at the moment to tell whether they are definitely in or out. You can guess a third are in, a third are out, and a third are in the middle.

"[Others] have viewed it too simplistically, for example, and created a contract that states they are not an employee and think that will do. Well, I'm sorry, it won't."

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The Editor