Revenue expands IR35 FAQ on NIC refunds and agency status

The Inland Revenue has updated its list of Frequently Asked Questions across a broad range of sections.

The updates concern: the repayment of National Insurance Contributions, SSP and SMP remuneration, whether or not your agent is your client, getting compensation on a wrong decision by the Revenue, third party contracts, the viability of IR35 proof contracts and Limited Liability partnerships.

All updates follow:

IR35: General - Question 16

If I pay NICs through an employment separate from my service company, and so overpay NICs overall by exceeding the annual maximum for primary Class 1 NICs, where does the repayment go to?

If the service company has recovered the contributions from the worker, the contributions will normally be returned to the worker, but can be returned to the service company with written permission from the worker. If the contributions have been paid by the service company and not recovered from the worker, the service company would normally claim the refund. (See Regulations 52(1) and 52(5) of the Social Security (Contributions) Regulations 2001.)

IR35: Computation – Question 27

When calculating the deemed payment, what do I do about SSP and SMP?

SSP and SMP are treated as remuneration derived from employed earner's employment, and chargeable to Schedule E tax. They should therefore be included with salary at step 7 of the deemed payment calculation.

As the deemed payment covers money that is not passed to the worker in a form liable to Schedule E tax, it should not be included in calculations regarding the entitlement to SSP/SMP.

IR35: Agency - Question 5

I get my contracts through an agency, but they say they are my 'client'. Is this true?

This is unlikely, but not impossible. If you contract to do work for the agency itself, such as installing a computer system for them or roofing their building, then they will be your client. However, if the work you do is for another business that the agency sends you to, then that other business will be your client for IR35 purposes.

IR35: Compliance - Question 5

If I act on an opinion given to me by the Inland Revenue, and it later proves to be wrong, can I get compensation?

Code of Practice 10 sets out our rules regarding the advice and information we can give. If someone wants to seek compensation in respect of incorrect advice we have given, then they must write to their local tax office, and:

• Say why they were asking for advice;
  
• Provide all relevant facts in an accurate format;
  
• Show that they have actually received advice from us; which has led them to act in a manner determined solely by that advice; and
  
• Suffered an actual financial loss (or a greater tax liability) as a consequence.

If all of these conditions are met, then we will consider a claim for compensation.

If we have been asked to give an opinion about a contract and have been provided with all the relevant facts then we will be bound by the opinion we give. This is true even if we say, in error, that a contract is outside IR35. In such cases, a worker will not experience any financial loss by acting on the basis of our opinion, so there will be no grounds for claiming compensation.

If we have been asked to give an opinion about a contract and have not been provided with all the relevant facts then any opinion we give under COP10 will not be binding on us. So, even if a worker experiences a financial loss by acting on the basis of the opinion we give, there will be no grounds for claiming compensation as the full facts have not been disclosed.

If we have been provided with all the relevant facts but say, in error, that a contract is within IR35 and a worker experiences financial loss by acting on the basis of that opinion, then there may be grounds for claiming compensation if all the requirements of COP10 have otherwise been met.

In all cases it is important to remember that a worker is not bound to accept or act upon any opinion we give under this process.

IR35: Contract - Question 10

What is a third party contract, and is it important?

A third party contract is a contract to which you are not a party. For example, if you have a service company and use an agency to find clients for you, then the contract between the agency and your client will be a third party contract.

The way in which you work for your client determines whether or not your contract falls within IR35, so the third party contract (between in this instance the agency and the client) is important, as it details the client's expectations of the worker (i.e. you).

Although, normally, you are unlikely to be a party to the third party contract, you may be able to get a copy from your agency or client simply by asking for it. If you can get hold of a copy, you should include it in any information sent to the Inland Revenue when asking for an opinion.

Alternatively, you could ask the agency or the client to provide an abridged version of the contract (leaving out such details as the pay, which the agency might not wish you to see), or else for a written statement by your client detailing the general terms and conditions under which he has engaged you.

If none of these is a practical option, then you should provide relevant contact details to the Revenue, so that the Inspector to whom you have submitted your contract can try to obtain any necessary additional details about the way in which you carry out work for your client.

IR35: Contract - Question 11

I have seen advertisements for 'IR35 proof contracts'. Do they work?

IR35 looks at the whole picture and not just the written contract. What is important in determining whether IR35 applies is the effective working relationship between the client and the worker and not just what is written in the contract.

For an 'IR35 proof' contract to work as advertised, the terms and conditions set out in that contract must mean that the working relationship falls outside IR35. Additionally, the effective terms and conditions under which you work for the client must match what is in the contract, so that it reflects the reality of the way in which you are working. If so, then it will fall outside IR35, but not otherwise.

IR35: Partner - Question 2

Are the new Limited Liability Partnerships affected by IR35?

Yes. IR35 applies where services are supplied through an intermediary, which includes partnerships.

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Richard Powell, UKTECH