IT contractors: why it pays to be careful about tax

Well-publicised HMRC crackdowns and new legislation mean that old assumptions about what is legal and what isn’t might not hold true

IT contractors, more than workers in almost any other industry, are comfortable with contracting and feel they are dab hands at managing tax affairs. However, well-publicised HMRC crackdowns and new legislation mean old assumptions about what is legal and what is not might not hold true.

Contractors need to be careful, regardless of how long they have been managing their own affairs, and ensure they understand how recent changes affect them. These changes include tightening up legislative loopholes, particularly around IR35, as well as introducing the General Anti-Abuse Rule (GAAR). 

This acts as blanket legislation to differentiate between what counts as responsible tax planning and what is abusive tax avoidance, rather than having to close each loophole as it appears.

For certain industries this is more relevant than others. The IT contracting industry is particularly prone to engage with contractors using their own limited companies – also known as Personal Service Companies (PSC) – even though they may not be genuinely self-employed.

This often occurs if workers are supplied through an agency, yet are unaware of the nuances and recent changes in government legislation.

Contractors need to look at whether they should be using a PSC – IR35 rules apply if they would have been deemed an employee of their client, had it not been for the existence of their limited company or partnership. Yet some contractors seem oblivious to the dangers and continue using PSCs even though it is not lawful for them to do so. 

This is an issue that needs to be addressed and it is now riskier than ever to attempt to reduce tax liabilities by taking dividends through a company, unless contractors are completely sure that they are outside of IR35 and won’t fall foul of GAAR.

On a positive note, research shows that most IT are aware they have had to become more aware in recent times of how they manage their tax and payroll affairs, because of the risks and implications of getting it wrong. These include being investigated by HMRC, having to pay back miscalculated tax from previous years and the risk of prosecution.

The increased awareness is a positive step, as the potential implications of unknowingly paying the wrong form or amount of tax are significant. It is very unlikely that the government will try and turn back the clock on these issues, so compliance and awareness are going to be key for all contractors moving forward.

For those not wanting to take unnecessary risks, there are other ways to manage payroll affairs which are simple, compliant and straightforward. This includes using an umbrella company administered by a regulated provider.

Matthew Huddleston, is Managing Director of FPS Group, a trading name of Freelance Professional Service. FPS Group is licensed by the Isle of Man Financial Supervision Commission

Read more on IT consultancy