Rising to 75% for contractors who operate a limited company.
Independent research commissioned by Tarpon Ltd† has revealed that over half of all UK contractors who independently manage their finances or use accountants, are potentially leaving themselves vulnerable to investigation through misunderstanding the complexities of taxation implications and accountability boundaries. They are also largely unaware of how to legitimately maximise their net income through leveraging tax benefits and understanding how to make provisions for sickness, slow payment and pensions.
The figure rose to 75% amongst contractors who operate limited companies or work through managed service companies, as they do not fully understand whether they are affected by regulations such as IR35. With the 2006 budget report indicating a consultation to clamp down on companies offering IR35-exemption through paying dividends as ‘disguised’ salaries, the reality of investigation is becoming increasingly apparent, particularly amongst this group.
The findings highlighted that whilst nearly three quarters of contractors are aware of such regulations, the majority of contractors who use accountants, consider that enlisting such assistance devolves them of personal accountability for ensuring adherence with financial regulations. In reality, contractors, including those who are directors of limited companies, ultimately have responsibility for their own compliance. Therefore, many are currently living under a false sense of security in the belief that they can offset responsibility to accountants or cite lack of knowledge as a reason for non-compliance. This can lead to unexpected investigation and added pressure for contractors.
This is exacerbated as the majority of those interviewed believe themselves to be exempt from IR35 guidelines due to the ambiguity of relevant criteria. For example, it was a common misconception that working to fixed rates, having multiple clients and working away from clients’ premises automatically meant that contractors were operating outside the IR35 catchments. However, the variable nature of these definitions means that contractors unwittingly fall under the remit of IR35 rules and leave themselves open to investigation, particularly when clients increase autonomy over their work.
"Understanding the complexities of contractors’ taxation and legal obligations requires detailed knowledge, financial expertise and a significant investment of time that most freelancers simply cannot invest," commented Minesh Gandhi, marketing manager at Tarpon Ltd.
"It is concerning that unscrupulous service providers are capitalising upon this vulnerability through promoting themselves as being able to operate outside the boundaries of IR35 or ‘restructure’ contracts so that they are exempt from IR35, even selling this service online. This misleads contractors to believe that IR35 regulations are based on the contents of a contract rather than the daily working situation throughout a project, which leaves them exposed to investigation and out of pocket."
"The Government obviously still has this issue on its radar and greater scrutiny of managed service companies such as composites, will benefit the industry as a whole. Whilst providing greater clarity for contractors, such moves will help to repair the reputation of those employment management companies that can legitimately help contractors by removing their taxation, legal and administrative burdens. " concluded Minesh.
For further advice on how taxation issues affect contractors call Tarpon Ltd on 0845 643 1580.
†Based on a national survey of 200 contractors.