Small businesses are being warned that they must take care when completing their IR35 declarations, as they might be inadvertently breaking the law if they get it wrong.
The way a business’s IR35 form is completed determines how HM Revenue & Customs (HMRC) assesses it for tax. And SMEs that use contractors are especially in need of diligence, thanks to the way freelancers are taxed, as in such a situation both contractors and SMEs alike pay less in taxes as opposed to an employee-employer relationship.
Hiring freelancers means that SMEs have a smaller payroll and can save a lot of money due to not having to provide holiday pay, sick pay, or make national insurance payments.
However, under the rules governing IR35, SMEs and contractors alike can get into serious trouble with the taxman if they’re using a contract working relationship to hide the fact that the contractor is really just a ‘disguised employee,’ as according to HMRC, disguised employment is tax avoidance.
The problem is that the area can be very complex and there is a fine line between a genuine contractual arrangement and employment, which needs to be clarified in the contract between the two.
If a contractor is targeted by HMRC it is very important to supply the information they request promptly and to take professional advice before replying to any letters.
Experts hope that HMRC will bring out clear guidelines by the end of this tax year, as the current IR35 guidance tests are less than ideal and extremely complicated.
As an accountant, Sarah Jenkins, specialises in management accounting, business development and financial reporting.