UK Contractors Playing Risky Game With Tax Affairs

by Robert Lee, Tax-News.com, London

17 October 2008

A new survey shows that contractors and freelance professionals in the UK are disregarding basic best practice in ensuring their contracts are outside IR35, putting them at risk of being caught by HM Revenue and Customs.

“It looks like a significant number of contractors are playing Russian roulette with their tax affairs,” says Dave Chaplin, chief executive of ContractorCalculator.co.uk. “The gun is HM Revenue & Customs, the bullet is the IR35 tax legislation. And with HMRC needing to collect as much revenue as possible to fill the Treasury’s empty coffers, it looks like it’s only a matter of time before the trigger is pulled.”

Chaplin was speaking about Wednesday's release of ContractorCalculator’s latest survey, which shows that most contractors rarely or never seek independent professional advice on their IR35 status, yet most firmly believe they would not be caught by the IR35 legislation or the taxman. The results of the survey show that:

• 93% of respondents believe their current contract is not caught by IR35, but only 24% have had their contract professionally reviewed to verify their belief
• 56% never get their contracts reviewed for IR35 status at all
• On the crucial right of substitution, which is increasingly seen as a key plank of IR35 defence, just 13% had an unfettered right of substitution, but only 5% have exercised that right
• 5% actually admit they would be unlikely to successfully defend their IR35 status if challenged, and 69% said ‘maybe’.

Chaplin expressed his concern about how many contractors do not appear to take the threat of IR35 seriously: “As many high profile IR35 rulings have made the national press, there is no reason for contractors to be ignorant of the risks they run in flouting IR35 rules. Plus, the fact that only 30% of contractors have tax investigation insurance and only 35% put away extra money in case they are caught demonstrates a worrying level of denial.”

He worries that many are simply burying their heads in the sand.

"After all, the latest IR35 case lost by a contractor, Dragonfly Consulting Ltd, saw contractor John Bessell facing a bill for back taxes of almost GBP100,000.

“My greatest fear,” concludes Chaplin, “is that if the Treasury decides to provide the necessary resources for HMRC to have an IR35 crackdown, a great many contractors will find themselves caught by IR35 and facing huge bills.”

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