Ensure you have the correct Inland Revenue classification code

"Ian Smith came to Harwood Hutton for advice. He was working as a management consultant, focusing upon the document management, passenger transport and print industries."

His company, Ian Smith Consultancy Ltd., had received a very large tax bill. Ian was surprised and concerned about this, and wanted to talk to someone for some guidance.

The Inland Revenue intended to tax Ian under IR35. Since April 2000, anyone who has been working via an intermediary, such as a company or partnership, is caught by Inland Revenue rules if they fail the 'Inland Revenue IR35 test'. The Inland Revenue test is constructed to determine if a contractor is (a) genuine contractor or (b) 'akin to employed'. If workers are a genuine contractor, i.e. passed IR35, they can continue to pay themselves a small salary and take the rest of their income in the form of dividends, which do not incur National Insurance Contributions. If they fail IR35 and are deemed 'akin to employed', (they appear more like an employee than a genuine consultant) they are treated as receiving a notional salary and will need to pay P.A.Y.E. an N.I.C. based on this.

The notional salary is equal to the company’s gross income from relevant engagements, less certain specified deductions (calculations are based on figures as at the last day of the tax year). The Inland Revenue had categorized Ian as being 'akin to employed', which gave rise to these higher charges. Graham Corney, Partner at Harwood Hutton, spent time understanding Ian’s business and considering his tax situation. Like Ian, Graham felt the categorisation by the Inland Revenue was incorrect. Graham decided to take on the case and dealt with the Inland Revenue on Ian’s behalf. Graham disputed a number of points with the Inland Revenue and highlighted the fact that Ian did not work for one client, but for several. Furthermore, Graham was able to show using various contract agreements that Ian was entirely independent from his client’s businesses. To supplement this Graham used existing case law. The result for Ian’s company was wonderful.

The Inland Revenue reviewed the situation again and decided Ian is a genuine independent contractor. Financially this meant a saving in the region of tens of thousands of pounds. This case shows how important it is to have the correct classification code with the Inland Revenue. The Inland Revenue had previously interviewed Ian. Graham pointed out that under present legislation the Inland Revenue cannot insist on the Proprietor/Director of a business being present when they wish to inspect the business records and cannot initially insist on carrying out the visit at the business premises. This can be carried out at the accountant’s premises and the accountant deal with the Inland Revenue queries. The Inland Revenue prepare for their visits and normally work to a script when asking questions. It is vitally important that the tax payer is prepared to deal with them or appoint his/her adviser who understands the implications of the questions before agreeing to any meeting.

Without the input of Harwood Hutton the savings would not have been made. Ian added ‘It is a great weight off my mind that Harwood Hutton has been able to deal with this matter for me. Like many small business owners, I feel that, with all the legislation around, and the complexity of the UK’s tax structure, the odds would be stacked against me and sooner or later I would inadvertently fall foul of the law. With Harwood Hutton’s support I know that won’t happen: their advice is excellent and much appreciated.’