Skills Survey 2002: Snared by IR35? Here are some options...

Two weeks ago we published a column by the Professional Contractor Group (PCG) about what can be done in the face of IR35. Here, accountants Ascot Drummond comment on some alternative courses of action for contractors...

The personal service company (PSC) can no longer be the automatic first choice for consultant contractors. Quite simply, if a contractor is caught by IR35, the tax advantages of operating through a limited company no longer exist.

Despite strong legal representation, the PCG has resigned itself to the British courts determining the government's IR35 legislation is both legal and constitutional.

That means that, since April 2000, anyone working via an intermediary will be caught by the rules if they fail the 'IR35 test'. This test determines whether a person would be deemed an employee if they were contracting directly with a 'client'. If they are deemed a 'disguised employee', they will be caught by the IR35 legislation. Accordingly, they will be taxed as though they are an employee.

Many contractors are now looking for alternative structures. Unfortunately, many agencies, accountants and other organisations - often those whose best interests are served by contractors retaining their limited companies - have adopted a 'head in the sand' attitude that has created a mixture of confusion and bad advice around IR35.

The positive news is that a number of dedicated contractor accountants are now operating 'employee schemes' which give consultants all the freedom of contracting without any of the hassle of running their own company - or IR35 worries. By joining an employee scheme, such as Vegas Management, contractors can expect to receive a similar benefits package to that which a permanent employee would receive. This should include all statutory employee benefits such as sick pay, holiday pay and a pension scheme. The higher calibre schemes will also provide professional insurances such as professional indemnity insurance, public liability insurance, as well as personal insurances, such as life cover and permanent health insurance.

Moreover, as an employee, not only do contractors benefit from being paid on the same day of each month without having to do any form-filling or chasing themselves, they are not restricted to the notorious five per cent expenses allowance.

For many consultants, particularly those looking to contract for the first time, the opportunity to work without any tax/IR35 concerns or administrative responsibilities is a highly attractive option. For many more contractors who face the prospect of being deemed employees for tax purposes, the emergence of a structure that reduces their personal risk while replacing their benefits, is a welcome fillip to the doom and gloom that is threatening to overshadow the flexible workforce.

There are three options if contractors are caught by IR35:
1. If some contracts fall outside the scope of IR35, working through a PSC may still be the best option
2. Become an employee of a management company

3. Leave the country - live and work outside the UK tax system.

In all situations, it is strongly recommended contractors talk to an expert to determine the best structure for particular circumstances.

About the author:
Martin Glick is an accountant and is the managing director of Ascot Drummond (UK) Limited, an accounting firm for small businesses. For further information on IR35, employee schemes or Ascot Drummond go to http://www.ascotdrummond.co.uk