Many of those who are new to IT contracting may wonder what IR35 is and how it will affect them. We explain here.

Previously, most contractors, especially IT contractors, generally used limited companies. Their income is paid into there and they extract expenses and salary from it before paying both Corporation Tax and personal tax.

Several years ago, the Government decided that some classes of contractor were really not contractors at all.

What they were really looking at were those people who were permanent on the Friday at a company and the next Monday they had become contract staff.

They felt, probably correctly, that these were disguised employees and that this was just a ruse on the part of the company and the new ‘contractor’ to avoid taxation.

Political debate is raging, but the fact remains that the UK economy is in a tough position. Because business conditions have such a powerful effect on the opportunities and income available to our clients, we’re always interested in the country’s economic prospects. I thought it might be interesting to see what the rest of the year holds for contractors, freelancers and self-employed professionals in a number of key industries.

Times are tight for the NHS. It currently faces the most severe period of austerity in its history – targeted to save up to £20 billion by 2015 with an ageing population and increasingly costly treatments. These funding pressures are unlikely to fade in the next couple of years and combined with the significant organisational changes currently being implemented, contractors will face both threats and opportunities.

At the IR35 Forum meeting in January 2013, HMRC confirmed that they are scrutinising off-payroll arrangements in the Public Sector and no job titles are to be considered “safe”.

Specific examples of locum solicitors being investigated were discussed during the meeting and it makes commercial sense for HMRC to review higher paid consultants to gain a greater yield of tax. HMRC have targets to meet after all!

IT contractors are also potential targets for HMRC along with other highly skilled professionals.

Is it significant that public sector contractors are subject to scrutiny at the moment?

There is a double whammy for higher paid contractors working in the public sector. Not only will the contractor face a financial penalty if incorrect tax is paid on income generated from the public sector client, but the end client (I.e. the public body engaging the contractor, whether that be the NHS Trust, government department, local council or other publicly funded body) may also face a financial penalty. This certainly helps with HMRC’s targets!

Over the last 18 months or so, tax avoidance has become an attention grabber, with the media, politicians and general public becoming increasingly outraged at various practices – from big corporates avoiding tax by transferring profits to other tax regimes, to freelancers working for the BBC and not being on their payroll.  Is anyone safe from this moral crusade?  It is often very difficult to cut through the noise and understand the reality of each situation.  The latest round of coverage now sees the Director of Public Prosecutions adding his weight to the ‘forces of good’ and committing to increasing prosecutions in cases of tax evasion.  It’s very easy to get swept up by this and assume all and any tax planning is bad.  Let’s be clear it isn’t.

This coverage has served to blur the line between what’s acceptable and what’s not by bringing in a moral dimension to tax planning.  I’m of the view that it’s the Government’s job to define via legislation what is lawful and what is not and then organisations and individuals to have an obligation to do what is lawful and not do what is unlawful.  Tax evasion is unlawful but organising your business and personal affairs in a way that minimises your tax liabilities is lawful – I would go as far as to say this should be a personal responsibility.  If organisations or individuals wish to individually apply a moral dimension to how they behave within the law, they have the right to do this.  But the law is the ultimate reference point.

So back to the original question – how worried should middle class professionals be currently?

Driven by the current climate, it is clear that certain groups are being targeted in terms of tax evasion and aggressive tax avoidance and, unfortunately, the professional classes seem to be right in the firing line.  Not only have we had statements by senior politicians and specific media coverage to highlight risk areas – freelancers at the BBC, offshore bank accounts, new policies on working for public sector clients – but we can see some specific enforcement actions being taken by HMRC.  We had HMRC’s ‘Tax Health Plan’ back in 2010 which targeted medical professionals, they launched a ‘task force’ targeting London lawyers back in September 2012 and restaurateurs were also specifically targeted by HMRC last year.  Earlier this month HMRC announced a further amnesty for hospital consultants, GP’s, locums, dentists aimed at persuading these professionals to voluntarily declare previously undeclared income.  It’s also likely that some professionals will be caught up in the HMRC enforcement activities relating to the tax agreement with the Swiss Government, the so called Christine Lagarde list and the HSBC whistle-blower information on Jersey bank account holders.