The news that the Professional Contractors Group will make a second legal challenge to IR35 shows that, for many businesses, the legislation is of great concern.
However, the financial services industry has still not realised how seriously it can be affected.
Unfortunately, IR35 is only a part of the problem. The underlying issue is employment status. While IR35 affects small limited companies, small partnerships, composite companies, etc, it does not apply to the self-employed individual.
They have always had to prove their status, even before April 2000. A great many registered individuals and IFAs come into this category, that is, they are not limited, etc.
If the Revenue says they are not self-employed, both they and the “client” have problems. The RI will have underpaid tax but the onus is on the client, usually an IFA or a network, to ensure the correct tax is paid.
It is a statutory obligation and means that they should deduct PAYE and NICs before paying the RIs. Otherwise the Revenue will demand unpaid tax and insurance. Nor will the IFA have paid employers NI. That can be expensive.
For example, an IFA has 10 RIs each earning £30k a year. The Employer's NICs is 12.2 per cent. On £30k, that is £3660 per RI per year or £36,600 for 10 RIs. The Revenue can go back seven years (20 if it suspects serious fraud), making the bill £256,200 before penalties and compound interest at 8 per cent.
Numerous organisations have many more RIs, each with greater earnings. Such bills could bankrupt them. So it is time to start taking employment status seriously and if anyone is told they are not affected, they should get it in writing.