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Why Self-Employed Should Now Be Wary

Tuesday, 28 October 2008

The High Court victory earlier this year by HM Revenue and Customs (HMRC) against Dragonfly Consultancy Ltd has far reaching tax and National Insurance (NI) implications for those who are self-employed or use a personal service company.

IR35 is a set of guidelines designed to crack down on contractors that escape tax and NI contributions by being 'disguised employees'. For example, if a company employs a contractor rather than a salaried employee, that worker does not any have employment levies deducted from their pay  - and the Dragonfly case highlights that HRMC is cracking down on those trying to escape the tax law.

John Bessell was the sole employee of Dragonfly Consultancy Ltd, and the recent court action against him centred on the IT consultancy he provided to the AA. Throughout his period of work with the company, Bessell claimed that he was providing his services through Dragonfly on a self employed basis - making him exempt from high levels of tax and national insurance contributions.

The High Court decided, however, that there was enough evidence to show that Bessell was working full time for the AA and therefore his claim of being self employed was false.  HRMC argued that this was largely due to the contract Bessell signed and the conditions under which he worked.

Nick Davies, director of reward and employment tax at Armstrong Watson, comments: "Bessell's contract with the AA stated that he would have to ask permission to provide his services to any other organisation or supply a substitute in his absence. He also had frequent appraisals with the company - all of which are regular practices of a full time employee.

"There are many lessons that can be learnt from the Dragonfly case - firstly, it is imperative that all those that are within IR35 must take immediate measures to protect themselves - and I would recommend that any existing contracts should be looked at thoroughly.

"In terms of the Dragonfly case, the contract should have been tightly drawn and shown that Bessell was self employed- especially in regard to the right to provide substitutes and the degree of control exercised by the client.

"HMRC is still actively investigating individuals who it believes is trying to escape tax and NI contributions, making sure that the reality of their working situation is in full accordance with their contractual terms. Therefore, no matter how tightly drawn a contract is, it is vital to make sure that it accurately represents how the relationship between the contractor and contracted works in practice.

"I'm great believer in proactivity, and rather than waiting for HMRC to come in and attack a consultancy relationship, I think it preferable to put a robust contract in place. You can then take it to HRMC to obtain agreement that it constitutes a contract for services. This therefore avoids any uncertainty and removes the potential for nasty surprises further down the road, provided the terms have been properly adhered to."

Notes to Editors:

Armstrong Watson is a firm of accountants, business strategists and financial advisers.

We have a network of 17 offices throughout the north of England and south west Scotland, with 36 partners and over 400 team members in a variety of areas such as: Business Enterprise Services, Business & Personal Tax, VAT, Corporate Services, Corporate Finance, Payroll, Insolvency & Corporate Recovery, Agriculture, Computer Solutions and Office Equipment, Financial Planning and Wealth Management.

Armstrong Watson is registered to carry out audit work by the Institute of Chartered Accountants in England and Wales and is authorised and regulated by the Financial Services Authority.

Armstrong Watson is ranked as the UK's 26th largest accountancy firm in Accountancy Age's top 50 accountancy firms. (2008)

Visit our relaunched website at www.armstrongwatson.co.uk