If you own an investment property there are several good reasons why you may wish to pass it to the next generation. The most obvious of these is as part of a plan to reduce your exposure to inheritance tax. Any gift of property you make results in your taxable estate, on your ultimate demise, being that much less and potentially saving 40% of your wealth for your family to enjoy. Alternatively, you may not need the rental income and you may be thinking income tax and wanting to take advantage of the lower tax rates that the children may have.

All this is potentially sound planning in principle but the problem standing in your way is invariably capital gains tax. When you give away a chargeable asset like property, the tax rules ensure that your gift is treated in exactly the same manner as if you had sold it at current market value. Consider two neighbours, Mrs A and Mrs B, each having an investment property which they have owned for many years. Each property is currently worth £300,000 and each was acquired for £50,000. Both find that their income is sufficient without receiving the rental income and each wishes to gift the property to their respective children.

Mrs A considers gifting the property to her children absolutely but learns that she faces a capital gains tax bill of up to £70,000. This imposition must draw on her vital cash savings which is not an attractive prospect. She procrastinates and eventually does nothing. Mrs A dies 10 years later and although property prices have remained flat, her estate suffers £120,000 inheritance tax on this property alone, leaving a mere £180,000 for the family who may be forced to consider a sale to fund the tax liability. Any growth in the value of the property would increase the tax payable of course and, in the meantime, she has suffered income tax on rentals she didn’t really require.

Mrs B is in exactly the same position and would not make the gift if it meant liquidating her other investments and suffering yet more capital gains tax on these disposals. Unlike Mrs A, she goes ahead but, after taking  advice, does not give the property directly to her children. She transfers it to a straightforward trust with her children as beneficiaries. Unlike the case with the absolute gift, capital gains tax holdover relief is available with the consequence that there is no tax at all to pay on the gift and the children, as beneficiaries of the trust, take over the property at its original base cost of £50,000. She dies 10 years later and the property suffers no inheritance tax charge as it is no longer in her estate.

Fortunately for Mrs B the value of her property is within her inheritance tax free ‘nil rate band’ of £325,000. Above this, and the transfer to the trust would encounter a lifetime inheritance tax charge at 20% on any excess. Another disincentive to action but one which is not necessarily a problem. If Mrs B has a husband that limit can potentially be doubled to £650,000 or even to £662,000 if this and last years annual exemptions are unused by both spouses.

That ceiling can be pushed as high as £1 million without a significant tax charge with properly considered planning and depending on Mrs B’s precise circumstances. Indeed, even if Mrs B had needed to retain access to the rental income then there is a perfectly legitimate way to achieve this without the property remaining in her estate for inheritance tax purposes.

Given that in practice property portfolio’s represent the most common asset class which is hammered by inheritance tax every year, an immediate charge to capital gains tax is very rarely an adequate reason for doing nothing when it can be deftly side-stepped by anyone in Mrs B’s position.

This article was written by Stephen Parnham.

HM Revenue & Customs look at companies using “income shifting” and are ready to attack if the opportunity arises. HMRC manuals state that officers should look out for companies which pay a salary to a director’s spouse, or other family members, just to make use of their lower tax rates. This is considered unfair avoidance. HMRC cannot object where your spouse or other family member provides a service and your company pays the going rate but excessively high salary payments won’t qualify for a tax deduction. Furthermore HMRC can treat the salary paid to your spouse or other family member as if it was paid to you, under trust legislation. You might also face a penalty for trying to evade tax.

You could create a job in your company for your spouse as the job could be something they do at home for activities such as sales calls, credit control and market research but if they don’t have much time to spare the amount you can legitimately pay them will be minimal. A possible solution is to invite them to join the board of directors in a non working (non-executive capacity). This means that their active role will be limited to attending board meetings and occasionally signing a documents. It seems a good strategy to divide Directors Remuneration between fees and salary. Have a consistent approach for all directors so that HMRC can’t argue that the arrangement to pay your spouse is just a sham to avoid tax. How much you pay is at your discretion but somewhere between £500 a month and £1,000 a month seems reasonable.

It’s not easy for HMRC to attack the level of director’s fees, like they can the rate of pay for a regular job. With the latter he can check the going rate with employment agencies to see if you’re paying over the odds but there is no such benchmark for director’s fees because they are not linked to the amount of work carried out,. Being a company director can be quite onerous and fees are intended to compensate directors for this burden as well as for managing the company.

IR35 is still with us, despite the fact that HMRC have recently lost a number of cases.

Some have seized on these in business/financial risk factors referred to in these cases and determined that these are the most important. Whilst, it is important to demonstrate that one is operating in a business-like fashion and having a designated office space, office equipment, business insurances etc, are all relevant, yet no IR35 status case has ever been won on the basis of these factors alone. Greatest emphasis is still given to personal service, control, mutuality and substitution. These are the key issues on which tribunal cases are won.

It is interesting that in the first of the recent cases to be decided, MBF Design Services, it was determined that it was highly unlikely that Mark Fitzpatrick (the Worker) would have been able to send a substitute to work at Airbus (the Client), but the Judge Malachy Cornwall-Kelly noted two important points: firstly, the contract between Airbus and the agency did not require specific individuals but resources to undertake the work; secondly, that his inability to send a substitute was “not inconsistent with his having been engaged as a professional man whose personal expertise was valued as might be that of an architect or surgeon. Against the background of MBF’s well-established existence and its history of engagements with various end-users, Mr Fitzpatrick’s status as a freelance specialist in his area is entirely credible.”

In my experience it is not unusual for the provision of a substitute to be impractical so this will be of comfort to contractors. By their nature specialist skills will limit the practicability of substitution.

With regard to control HMRC often argue that being tied to the site and the client’s working hours is an indicator of control, as they did in the case of MBF: however the judge took issue:  “Mr Fitzpatrick’s design work had normally to be performed on site and with Airbus’s equipment because there was no other sensible way to do it, given the nature of the overall project of building an aircraft; there are many other examples of an independent contractor’s work being done on the client’s site and with the client’s equipment for the same sort of reasons: an electrician repairing a wiring circuit, a plumber adapting a drainage system, an engineer checking a safety installation of an oil rig and so on. In the context, we do not see on-site working as a conclusive indicator of employment.” In other words it appears that the client may have control over “when” and “where” the work is performed and presumably the client usually decides what is to be done: however it is “how” the work is done which determines where control lies.

Again this will resonate with contractors on long term assignments such as project managers who would be looking to defend themselves against IR35 despite being tied to locations and fixed working patterns.

With regard to mutuality of obligation HMRC consider that mutuality exists if work is provided and a fee received but this point which was completely refuted in the ECR Consulting case. When presented with the argument that this would be enough to ensure that the irreducible minimum of mutual obligation existed in the hypothetical contract, the judge said:

“We cannot accept that. As indicated earlier we believe that VDS (the Client) was unconcerned as to who the contractor should be, they were merely interested in obtaining a necessary skill for the shortest period of time as cheaply as possible. We do not accept that there was any mutuality of obligation.”

Related to this point, HMRC have argued that hourly rates were indicative of employment to which the judge in the Primary Path case took issue, believing that for someone of Phil Winfield’s (the Worker) skill and expertise a monthly salary in an employment contract would be more appropriate. He felt hourly rates were a feature of the charging structure of both professional firms and skilled tradesmen and if they pointed in any direction – it was away from employment. This is an interesting interpretation of hourly pay and will be reassuring to contractors who are engaged on an hourly or daily rate.

The recent cases are refining the guidance that was available from earlier IR35 cases such as Dragonfly Consulting. Non IR35 cases such as Autoclenz also help to provide general guidance regarding tax status which is useful to remember. In Autoclenz the Supreme Court outlined the key questions that a Tribunal must answer when assessing a disputed contract namely:  What are the ‘actual legal obligations’ of the parties? And what was the true agreement between the parties? This is re-enforcing the principle that was highlighted in the earlier Weightwatchers case that contractual terms must reflect reality. It impacts IR35 cases in so far as contractors need to think about how substitution and other key clauses could work in practice and start to reflect this is in their contracts rather than just using standard clauses. This will focus their mind on what is and isn’t possible so that contracts are in line with what happens in practice.

HMRC for their part are no doubt looking for “softer-targets” to challenge as far as employment tax status is concerned and they have stated that they will be looking at actors and potentially other professions working through service companies.  Such companies still provide the opportunity to make taxation and national insurance savings and as long as they do so will be a bone of contention for them.

Whilst the government did not want to lose face by abolishing IR35 it seems that they must also target other areas of “false” self employment to be sure of success.  Arguably sectors such as the construction industry could provide richer pickings. Definitely a case of watch this space for further developments in the strategy used by HMRC.

I can remember when accountants in practice were strongly encouraging sole traders and partnerships to incorporate based on the £Nil rate corporation tax band for the first £10,000 worth of profits.

There is a possible return to this push by accountants to incorporate their larger sole trade and partnership clients for a different reason, namely limited liability.

Many of these businesses are facing difficult timers due to the tough economic environment in which we find ourselves and limited liability is a valuable benefit to consider.

A company is a separate legal entity from its shareholders so it is generally the company, rather than its proprietors. which is liable to creditors. Therefore, with increased financial risks being faced, the limited liability afforded to shareholders of a company is becoming a major attraction. There may also be other commercial benefits such as the ability for employees to participate in share ownership and additional finance raising opportunities.

There are “cons” to consider as well as “pros” though. These include increased administration and disclosure requirements, higher insurance costs and, for a company having no history or credit rating, obtaining credit without directors giving personal guarantees can be difficult.

These are just a few examples which illustrate that the decision to incorporate is very rarely straightforward.  Generally though the changes announced in April 2011 have increased the savings associated with a limited company, compared to self employment or partnership. The corporation tax rate for companies with profits up to £300,000 fell by 1% to 20%, whilst for the self-employed National Insurance increased by 1% to 9% (and to 2% for profits over £42,475), in addition to income tax rates up to 50%.

The payment of corporation tax is still made in arrears as well, compared to the self employed and partnerships who are locked into the self assessment regime with payments on account due each January and July.

Using efficient profit extraction policies, incorporation can save thousands of pounds worth of tax. Greatest benefit is obtained if profits are being retained in the business for expansion or the repayment of loans.

If you are still a sole trader or partnership maybe now is the time to incorporate – its certainly worth giving it serious consideration.  If you are wondering about the merits of Limited Liability Partnerships this will be covered in a future blog posting so please return for more guidance on this.

Robert Bradley

Introduction

Following recent tax changes the benefits of incorporation have been eroded. Ten points to consider when deciding whether or not to incorporate a business are considered below.

Administration

There is more administration involved in running a limited company, as compared to a sole trade or a partnership. For example the company will need to prepare accounts for the tax authorities and Companies House, as well as submitting an Annual Return. A PAYE scheme will also attract year end returns and a returns of director’s benefits in kind. The directors will also need to submit personal Self Assessment Tax Returns.

Legal

The Company Officers are responsible for their actions as officials of the Company. Under the provisions of the Companies Act 2006 there is no need to appoint a Company Secretary but if you do they will be have legal responsibilities in the same way as directors do.

Tax considerations

Will incorporating save you tax and National Insurance? This will normally only be achieved if you are a higher rates tax payer.

Remuneration

The normal practice for owner managed Companies is to take low level of Remuneration to save tax and national insurance, supplemented by dividends. Other factors should be borne in mind such as the need to maintain income for the purposes of obtaining personal finance or pension purposes.

Husband and wife

Is your wife going to be involved in the business?

Motor expenses

Unless only a small business mileage is being undertaken it is not generally tax efficient for owner managed companies to provide directors with company cars. It is generally more tax efficient to claim mileage expenses using the approved mileage rates.

Other expenses

Expenses such as office running and travelling costs are deductible against company profits using less stringent rules than is applicable to employees claiming expenses. Overhead costs such as telephone should paid using accounts be in the company’s name and not in the name of directors, thus avoiding problems with benefits in kind. A company credit card or debit card should be used for company expenses as the reimbursement of amounts paid on personal credit cards will lead to problems with benefits-in-kind.

Company vans

Company vans are now taxed at a higher rate than previously because directors and other employees who fall within the scope of benefits in kind are penalised where vans are provided for private use.

Property

It is not generally tax efficient to introduce properties into limited companies due to the fact that entrepreneurs relief is not available to them in the same way as it is to individuals.

IR35

Management Consultants and IT Contractors who incorporate should ensure that they are complying with the requirements of IR35. Contracts should be drawn up which provide for independent working patterns and the ability to provide a substitute. The practical reality should reflect the provisions of the contract.  In all cases travel from home to work and travel expenses incurred whilst working away from home will only be allowable for up to two years from the commencement of the contract.

Next step

For specific advice relating to your circumstances contact Robert on 01299 879140      .

Robert Bradley and Steve Parnham work together to offer a full range of busineess taxation, capital  taxes and self-assessment services.

Recent projects have included:

• Incorporation of sole trader with goodwill valuation
• Set up of trust as vehicle for for limited company investment property

For more information on how we can help you plan your tax strategies contact Robert Bradley.

Thing of cutting your staff costs in the recession?

One way businesses think they can reduce costs in a recession is to make some of their employees self employed. This can be very dangerous as borne out by the recent Autoclenz case.

This involved a group of 20 car valeters who had been engaged on a self employed basis by Autoclenz.  Their contracts clearly stated that they were self employed but this is not enough to establish that they are. The actual circumstances were not consistent with self employment and they were ruled to be employed. This was referred to in the earlier weightwatchers case and now has been codified in the precedent set by Autoclenz.

The Autoclenz valeters were able to establish employment rights including unpaid wages, holiday pay, or failure to be paid the national minimum wage. My expertise usually leads me to looking at situations where the taxpayer wishes to prove that he is self-employed to be able to save tax but the opposite applies and employees who have been “pushed” into false self employment by their former employers may well seek future recourse.

The tax liabilities arising from the reclassification of self employed contractors as employees can be significant – The well publicised Dragonfly IR35 case resulted in an assessment of £99,000 but this pales into insignificance when compared to the 24.5 million pound assessment levied on Weightwatchers that the US parent company had to fund.

It is worth looking at what went wrong at Weightwatchers to give rise to this.  The Employment Tribunal which initially heard the case held that there was a relationship of employer / employee based on the tests established in the well quoted in Ready Mixed Concrete case of 1968, namely

(i) The weightwatchers leaders only had contractual rights when they led meetings themselves and so by definition had to provide personal service

(ii) Weightwatchers had a high degree of control imposed by the contract the leaders signed which did not give them freedom to decide how where and when to run the meetings.

(iii) The level of control, together with the personal service element, was characteristic of a contract of service and other provisions were, in total, consistent with this.

The tax appeal tribunal that decided the case agreed. The point is that before employers think about reclassifying their employees as self employed contractors as a way of, perhaps, offsetting the increasingly onerous national Insurance costs they should think carefully about the tests which establish self employment not just contractually but also in practice.

My own feeling is that business tests, such as financial risk, should be the true test of whether or not an individual is employed or self employed but the HMRC Office of Tax Simplification proposals have not adopted this as a preferred test, instead preferring to rely on arguing the case on the other  badges of trade such as the provision of materials and equipment, personal service, control and mutuality of obligation. The first two of these formed the basis of the proposed tests which the labour government discussed before it lost office and would potentially have reclassified the majority of the labour only subcontractors in the construction industry as employed. The current government would no doubt like to adopt these proposals themselves, given the extra tax and national insurance it would raise.  The downside would, of course, be a boom in the cash economy which some say is already returning in the construction industry.

In the meantime we are left with grey areas about whether individuals and their businesses are caught by employment status issues, IR35, National Insurance regulations, the European “worker” definition or the construction industry rules.  Seems like it’s time for clear rules around what constitutes self-employment based on business tests.  Surely the government must seek to remove artificial barriers to entrepreneurial spirit in these difficult economic times.

ROBERT: As a Trust & Estate practitioner you are in a privileged position to advise on planning for inheritance tax and its implementation but what can you tell me about the practicalities in the real world ?

STEPHEN: In the real world the blunt fact is that a stopwatch starts ticking on the day after you die.  It stops just over 6 months later.  That is the day your family must pay the inheritance tax due on your estate.  If your family needs to obtain probate, and they will where your assets include shares or property, tax may be due at the time of the probate application itself.  That is likely to be little more than a few weeks after you die. The crucial issue for the family is therefore how on earth to pay the tax ?

ROBERT: What are the implications ?

STEPHEN: The tax on property and certain shares can be paid by instalments over several years but most people feel that is a just a bit too much like taking out another mortgage.  Where the value of your estate is concentrated in property or shares in your own company the result is often hasty sales or liquidations to obtain the necessary funds.  At a difficult emotional time for the family  they are also faced with impossible decisions – it is not quite the legacy they or you might have anticipated.

It is not just that the estate is significantly less, perhaps 25% or 30% less,  than everyone thought as a consequence of the tax. It is the very practical issue of selling the family jewels or taking out loans to pay for it.

ROBERT: Can you change that unintentional legacy ?

STEPHEN: In almost every case the answer is ‘yes’ so long as you are prepared to take a medium term perspective.

ROBERT: We have discussed inheritance tax in general but what about specific asset classes ?  For instance, many of my clients run their own business through a company.

STEPHEN: The good news is that shares in your own trading company can secure 100% relief from inheritance tax on your death.  Investment companies are different even if the investments amount to a business.

The bad news is that HM Revenue & Customs will, given that the relief is so valuable,  go through your last 3 years accounts with a fine tooth comb to disqualify you from the relief where there is any chance of them doing so …. and in many cases they will succeed simply because it has all been left to chance.

Common failings are excessive cash or investments on the balance sheet and inappropriate group structures which can dramatically reduce or even wipe out this valuable relief and expose the family to tax of close to 40%.  Commercial property held outside the company will not benefit from the full relief. There are many, many other pitfalls. If you or your family don’t really know the position by the time HM Revenue & Customs are reviewing your accounts then your legacy has been left all to chance.

It is a fact that all tax reliefs must be earned.  That is because there are always stringent conditions which must be met to qualify for them.  This relief is a complex one and there are many hurdles to cross and traps to avoid.  It is equally true that very few businesses which do qualify really capitalise on the tax saving opportunities open to them as a result – with the right planning, for instance, even investments can be sheltered from inheritance tax using this relief. The result of leaving it to chance is often at least tens or even hundreds of thousands of pounds in unnecessary tax.

HM Revenue & Customs  are certainly going to review your accounts and background in these circumstances, there are no exceptions.  Are you gambling that your accounts and circumstances will withstand the scrutiny of HM Revenue & Customs best ?  Get it wrong and the cost is high for the family.

Yet if you play this game cleverly, you can literally have your cake and eat it as well.

ROBERT: …and what about property ?

STEPHEN: Unfortunately, there are no specific reliefs for property or property companies and so one either accepts the inevitable tax charge of up to 40% or one looks to make a start with some smart estate planning.  There are no magic bullets here.  Time is your ally if you take the medium to long term view and take the initiative.  It is your adversary if you leave it until the last minute.

The key to smart planning in this area is often to restructure the way that property is held and/or to gradually transfer some of your interest in it in such a way that the value transferred suffers neither capital gains tax nor inheritance tax at the time you do it.  Giving it all away is not usually a very practical strategy whatever the tax savings may be.

In other words, you need to aim to make the whole thing painless and yet retain decisive control over your property while taking steps to reduce the longer term tax exposure of the family.   All that is achievable.  In the right circumstances, it is even possible to give property away and retain access to the rental income.

ROBERT: Could you sum up ?

STEPHEN: Live in the real world.  Few people would knowingly leave a significant legacy of, say, 25% of their wealth to HM Revenue & Customs rather than their family.  The family would definitely not wish you to make such a decision.  That is, nevertheless ,the practical effect of doing nothing year after year in a significant number of cases.   It just doesn’t have to be like that.

The rules around what constitutes employment and self employment were codified over 40 years ago but it still remains a contentious area. This can be attributed to the differing practical situations that arise, the ambiguity of contractual terms and perhaps most importantly the inconsistency between contractual terms and the practical reality of working arrangements. This is perhaps the contribution the recent Weightwatchers (WW)₁ case has made to the established precedent, namely it demonstrated that courts and tribunals will increasingly take the reality of a situation into account and not just focus on the terms of any written contract between the parties.

The WW case held in the First Tier Tax Tribunal and concerned the tax status of leaders working for the weightwatchers organisation. The terms under which the leaders worked were, arguably, contradictory.   WW’s Self Employment and Income tax booklet, for example, reportedly set out the position that Leaders are self-employed but then stated that this does not affect the leaders’ entitlement to receive holiday pay as this was something that all workers were entitled to.  Such inconsistencies can prove fatal to an attempt to persuade a court that it should be influenced by an intention of one party to another based on contractual terms, particularly if it is in conflict with what happens in practice. From my experience “self employed” contracts often start their life as employment contracts and herein lies the problem.

Cases involving tax status are invariably made more complicated by the body of relevant legislation such as the Income Tax (Pay as you Earn Regulations) 2003 and The Social Security Contributions (Transfer of Functions) Act 1999, as well as the Working Time Directive. Each of this afore-mentioned legislation has its own terminology and this is often unhelpful in trying to interpret the rules that apply to cases brought before the courts.  The tribunal in WW itself observed that it is was unfortunate that H M Revenue& Customs (HMRC) had chosen to use the term “worker” in its determinations, presumably because it is actually a status given by European law to not only employees but also self employed. HM Revenue & Customs often commence their investigation using the Pay as You Earn (PAYE) legislation and then attempt to increase their “tax take” by broadening the scope of their action

This generally leads to a consideration of what constitutes employment and in this context courts still refer to the tests laid down by MacKenna in Minister of Pensions and National Insurance₂. This is a 1968 case but is still considered authoritative in setting out the tests of employment and was referred to by the judge in the WW hearing. These tests have been interpreted over time to aid in the definition of self employment. A body of cases has given us the so called “badges” of trade but self employment is still effectively defined in the negative. If someone is not employed then the inference is that he is self-employed. It is because of these facts that the Ready Mixed Concrete case is so important but sometimes this excludes a full consideration of the badges of trade”, which is unfortunate. These indicators of self-employment should, perhaps, be given more importance as they include financial risk which I regard as key in looking at the commercial reality of arrangements between two parties, where the tax status of the person undertaking the work is in doubt.

My favourite illustration of this which I often use during my talks on this topic is taken from the construction industry.  If a labour only “self employed” builder constructed a building which subsequently developed a fault due to faulty materials which party would stand the cost of the time to rectify the problem? I would argue that if the builder did this would be a strong indication that he was self employed under a contract for service since he has demonstrated financial risk. If on the other hand the main contractor he was engaged by stood the cost this may indicate a lack of financial risk on the builder’s part and lead a court to decide that he is engaged under a contract of service. This is equivalent to’ employment and should be distinguished from a contract for service which is analogous to self-employment. I am assuming for the purposes of this example that the contractual terms between the parties regarding tax status are unclear, which is often the case in practice.

The judgement in WW case was very much concerned with the commercial reality of the situation and in my view financial risk is the clearest indication of this in practice. It appears that the Weightwatchers leaders had no financial risk and would find it difficult to align themselves with another one of the badges of trade. Instead the tribunal appeared to take the view that they were entrapped by the criteria set out in the Ready Mixed Concrete case for employment to exist, namely control combined with the inability to provide their own substitute.  The contractual terms were of no assistance to them either as they did not appear to accurately reflect the reality of the situation in terms of the employment status of the WW leaders. As early as the 1978 case of Massey v Crown Life Insurance Lord Denning MR stated that “if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label on it”.

Any HMRC team that undertakes an employer compliance visit today will apply the same principles. Businesses should be warned that “false” self employment will always be a target of HMRC and has proved to be a popular line of investigation for them in a number of business sectors. These  include one man company contractor situations where the Revenue can use its powers under the IR35 Intermediaries legislation and the Construction Industry where it has always sought to reclassify labour only subcontractors as employed. The former has proved less lucrative than the latter.

Whilst the WW case does not fit either of these typical scenarios it certainly highlights the approach of the revenue in looking for easy targets where the commercial reality does not accord with the terms of engagement. The rules are plainly set out in the HMRC literature and are also demonstrated by the Employment Status Indicator  (ESI) test on their website so businesses who fall foul  the rules must share part of the responsibility. Whilst the ESI test is often not conclusive it does at least provide the employment triggers to consider in a given situation and caution should be exercised where the result of an ESI test is unclear, particularly in the case of businesses engaging contractors for long term assignments.

The Professional Contractors Group has long fought for the abolition of IR35 which may be imminent on the basis it is a piece of legislation which few understand. I’m sure, however, that the promised “overall review of small business taxation” will seek to stamp out false self employment in all situations. If this results in clearly written legislation which reflects commercial reality then I think this can only be a good thing. A level playing field is long overdue and should be welcomed by businesses, regardless of whether they engage employees or contractors.

Robert Bradley heads up Bradley & Associates, a Worcestershire based accountancy practice which works closely with legal professionals and is accredited by the Professional Contractors Group.

References:

₁ Weight Watchers (UK) Ltd & Ors v Revenue & Customs [2010] UKFTT 54 (TC) (02 February

2010)

₂ Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2

QB 497

₃ Massey v Crown Life Insurance [1978] ICR 590, CA (1977 Nov. 2, 3, 4, Lord Denning M.R.,

Lawton and Eveleigh L.JJ).

Before you sign a contract for service as an individual it is always best to have it reviewed by an accountant who is familiar with the IR35 rules.

Three issues need to be considered:

Control: Are you under the control of the end client?

Personal Service: Are you obliged to provide your personal service to the end client?

Mutuality of Obligation: Is there mutuality of obligation between the end client and yourself?

H M Revenue & Customs need to establish on all three counts that the answer to these questions is in the affirmative. If they can the Agreement is caught by IR35. If they fail on any count the Agreement will not be caught by IR35.

The general commercial terms in the Agreement may also be relevant in determining whether the Agreement is caught by IR35 if the main clauses relating to the above criteria are ineffective or omitted.

If you are uncertain about any of the above in relation to your own contract please post your queries and l will answer them.

The judge’s verdict in a recent case confirmed the dangers of relying of relying on advice from the Taxman. The case of Corteck Limited involved a businessman, Mr Malde who was given advice over the phone by HMRC’s National Advice on the VAT treatment of exports. HMRC later took a different view from the advice they had previously given and issued a VAT bill. Corktek appealed saying that HMRC should be bound by their original advice, even if it ultimately turned out to be wrong. The case ended up at the High Court where HMRC won. The lessons to be learnt from this case are:

• If you ring the National Advice Service provide them with as much information as you can. regarding the reason for, and the facts behind, your question. Keep a note of the date, time and details of the conversation.

• Don’t rely on oral advice alone. Follow up the telephone call with a letter clearly setting out your understanding of the advice youv’e been given, and ask for written confirmation.

Although this case involved VAT, you should apply this advice to all taxes and all HMRC helplines. Often helpline staff are simply reading advice from help screens which is publicly available in their VAT guides so given this lack of expertise on their behalf, you need to guard against errors that could occur.