Market Outlook 2002: Do accountants understand IR35?

Whether an IR35 challenge by the Inland Revenue is successful or not can depend on what advice a contractor receives from his or her accountant in the early stages. When the Revenue comes calling, how many accountants genuinely understand the legislation well enough to be able to help contractors cover their bases and avoid escalating investigations costs?

Mike Phillips, Director of accountants Albany Systems, told UKTECH: "Unless they specialise in serving freelance contractors, the average accountant is unlikely to understand all the issues. Indeed, neither do most contractors. In our experience of contractors not accepting IR35, very few have prepared a sufficient defence in the case of an attack by the Inland Revenue. What will come as an additional shock is the extra accounting cost they will have to incur in mounting a defence against the Inland Revenue."

The Professional Contractors Group protects members against such costs with free tax investigation insurance.

A recent appeal by the Institute of Chartered Accountants for England and Wales advised its accountant members to check whether clients could be at risk from an imminent Revenue clampdown, supporting Mr Phillips' advice that contractors should prepare themselves for the unexpected...

Mr Phillips said: "We expect there to be much more activity from the Inland Revenue over 2002. During the last 18 months, they have been creating a database of companies suspected of being caught by the IR35 legislation. Our advice will be given on a case by case basis. If a contractor client has a strong defence, we will encourage them to invest in the cost of a defence action. Conversely, if the contractor has no defence, we will encourage them not to waste any more money and accept the additional tax cost imposed on them by IR35."

One of the major testing points for contractors in 2002, other than the state of the market, will be the amount of effort agents and clients put in to drawing up contracts that accurately describe the business-to-business relationship between themselves and the contractor's limited company. However, contractors should be wary of contracts that leave holes in the description of this relationship.

Mr Phillips said: "We are concerned about the concept of an 'IR35 friendly' contract because the Inland Revenue can establish if the contract truly reflects the actual work carried out. Most clients and agencies still have their heads in the sand on this issue. They must understand that if the contract is drafted in a way that does not reflect the true nature of the relationship, the agency or client could be prosecuted by the Inland Revenue for assisting in tax evasion."

Mr Phillips estimated the contract market to be down 20 per cent on its high in 2000.

"It is likely to further reduce in size during Quarter 1 of 2002, before stabilising during Quarter 2, and then begin to pick up in Quarter 3," he said.

Kevin Miller, PCG Director, added: "As in any field there are some accountants who are very well versed in tax status issues and others who are not. One of our most frequent topics of discussion on the PCG website's Legal and Accounting forum is requests from members for a recommendation for a new firm of accountants. PCG members have experience of all sorts of firms and frequently exchange views on firms.

"PCG has put out guidance in the last few months on what are the reasonable steps a contractor must take to determine their status. It is not essential that they take professional advice providing they make sure they are familiar with the IR35 legislation and the main status issues and consider their position objectively. However, they must not rely purely on some gut reaction that 'IR35 is unfair and I cannot be a disguised employee.'

"Contractors must consider the facts and the issues. PCG and its members can help with this and many of the regulars on our forums are probably more up to date on status issues than the average accountant."

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Richard Powell, UKTECH