Now, says Taff Associates, a business consultancy spun off from Manchester Business School, both small businesses and self-employed individuals (SEI) can expect to “feel the heat.”

IR35 refers to a set of rules designed to stop freelance contractors avoiding tax and national insurance contributions by setting up a service company or partnership with others. They were first proposed in 1999.

The Inland Revenue says IR35 is meant to combat such arrangements “in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker”.

The Revenue’s recent heavy investment in IT systems is designed to “facilitate a well co-ordinated and systematic approach,” comments Taff. So from now on, their investigation strategy is expected to be much more sophisticated.

Information can be gathered from the self-assessment return, the P35, the new business registration form and from the “extensive powers” available under the Taxes Management Act 1970 to identify possible targets.

Terry Foulkes, director of Taff, said, “We have said since the outset that the Revenue intends to force companies to police IR35 and all employment status issues.”

“But,” Foulkes insists, “it goes much further than that. To focus its operations the Revenue needs to sort the wheat from the chaff.”

Many of the national insurance and tax return forms have been changed to highlight employment status issues or areas for investigation, Foulkes continues.

The latest step has been to issue form 46G. “It asks for details of all payments made to people who are not employed in the business,” Foulkes explains. Payees of all kinds, including people who say they are self-employed, will have the details of payments made to them, given to the Inland Revenue without their knowledge.

The Revenue has also introduced performance targets, to improve efficiency further. Inland Revenue offices have to be successful in 75% of their investigations.

IR35 came into effect from 6 April 2000: claims for unpaid tax, interest and penalties can go back to that date.

Foulkes warns that anyone caught under IR35 will be treated as employees of their company and “95% of relevant turnover is treated as salary for PAYE and NIC purposes.”

This could mean a substantial loss of income for such people – from 12% to 30% or more depending on a business’s turnover. For self-employed individuals, the Revenue can go back seven years to claim unpaid tax.

Foulkes believes that many people setting up a small business could, unwittingly, fall foul of the new arrangements, “because they do not understand how it applies to them and therefore do not take the necessary remedial action.”

“Anyone who might fall within the IR35 rules needs to take immediate steps to determine clearly whether the way they operate puts them into Schedule D [taxation for those who carry on a business] or E [for employees],” Foulkes adds.

The Inland Revenue has a “dedicated helpline for IR35 matters”: phone 0845-303 3535.

With thanks to Lloyds TSB Success4Business.

See also: HMRC lays down IR35 compliance principles ahead of the new tax year April 6 2021