| Q
: What does your company do?
A : InPractice Software Ltd supplies mainly to accountants.
Accountants and IT Contractors alike have 'phoned to talk
at length about this solution-driven approach. This
model contract package is devised in conjunction with lawyers, tax specialists
and tax lecturers.

Q : What is the InPractice approach?
IR35 usually does not apply to the typical business on
the High Street. IR35 enters the picture if the business
chooses to work through an agency - after all, in global
commerce, which entrepreneur conducts business through
an agency?
The dilemma is how to avoid IR35 and still keep all parties
happy. To do that, One-Person Operation needs to:
a - not only contract DIRECT with the end-user client,
b - but also contract direct with the agency to outsource
activities such as marketing and debt collection,
c- and also have a legally binding contract with a substitute
waiting in the wings.
In other words, conduct business in the way the "entrepreneur
on the Clapham Omnibus" would (being the test of
reasonability). Whilst tax planning never provides a cast-iron
guarantee, the One-Person Operation should in this way
have something more solid to argue with, provided the
underlying situation genuinely follows what is contracted.
So, such a direct contract needs to be strong on tax.

Q: A large corporate has
invited my One-Person
Co Ltd to carry out specialist IT work but insists the
contract is via their nominated agency. The agency's contract
wording is in the traditional back-to-back style and so
would appear to fall foul of IR35. Neither the large corporate
nor the agency are willing to change their position. How
do I cope with this situation?
A: You should explain to them that you are being asked
to enter into a bargain you may not be able to afford
for the exposure to an unquantifiable IR35 tax liability
in the future. So, you should negotiate one of these options:
(1) Agree to insert a clause in the back-to-back contract
to indemnify both yourself personally and your One-Person
Co Ltd from any future tax bills arising as a result of
IR35. Please note such an indemnity can prove to be worthless
unless backed by a bond in case of an insolvency. Your
financial statements may need a disclosure by way of a
Contingent Liability Note.
(2) Enter into DIRECT negotiations and contracts between
your One-Person Co Ltd and:
a - the end-user client
b - the agency
c - your substitute contractor.

Q : What if the agency
insists I work
through a Ltd Co?
A : The fireworks may not start until a year or
two after 6 April 2000 when tax investigations produce
disputed tax assessments.
A meeting is almost always held between a representative
of the large corporate and the prospective IT worker.
If that stage is not handled well, the Revenue can argue
that the meeting in reality resulted in a verbal contract
of employment and that the Ltd Co was imposed at the behest
of the agency or the client (large corporate). In English
Law, the only contracts that have to be in writing to
be binding are those relating to Marine Insurance and
Land. All other types of contracts are binding when agreed
verbally. Engaging an individual verbally
can be held to be a verbal contract of employment!
If so, the Revenue can look to the end-user client (large
corporate) for the balance of IR35 taxes not deducted
at source. A large Regulation 49 (payroll regulations)
tax assessment on a One-Person Co Ltd may render it insolvent.
The Inland Revenue may then look to the end-user client
(large corporate) for the remainder of the taxes not deducted
at source. It may be argued that the agency creates the
legal relations between the One-Person Co Ltd and the
client. However, time will show how this matter unfolds
but why not take protective measures from the outset by
using a model agreement?

Q
: Would "InPractice IR35 Model Contract" turn
my One-Person Co's situation into that of a business?
A : InPractice IR35 Model Contract is a useful
tool to formulate and document your contract for services.
However, each situation is unique. This product is not
a clever device to circumvent the tax. Answers to the
InPractice Fact-Find Checklist would show the overall
reality - is it an arrangement of employment nature or
that of business nature? Does the One-Person Operation
have the NEGOTIATING POWER (not always the case
if their agency is too rigid) to negotiate terms with
their client? If weaknesses highlighted by InPractice
Fact-Find Checklist are renegotiated, you can turn your
tax situation into something more solid. In the landmark
tax case Ayrshire Pullman Motor Services and Ritchie v
Commissioners of Inland Revenue, Lord Judge Clyde said
in his judgment words to the effect that the taxpayer
is under no obligation to allow the taxman to put "
... the largest shovel into his stores". So, renegotiation
of business terms is a legitimate activity.

Q
: In short, how do I survive IR35?
A : You don't
have to cave in to IR35. You can save the situation if
you are a TRUE enterprise that conducts its operations
like other genuine businesses do. Buy a license to InPractice
IR35 Model Contract package, renegotiate terms and use
it to sign a contract direct with your client. It is not
unusual for businesses to outsource marketing and debt
collection - Satchi & Satchi marketed a political
party in late 90's elections. If an agency is used, buy
the Agency IR35 Model Contract and use it to outsource
the marketing and debt collection. Doing this may be a
culture change (for IT contractors and other One-Person
Operations) and some grafting may be required to rearrange
business methods but then being in business has never
been easy! Businesses need to be innovative. The IR35
hurdle is just another hurdle to clear in business life.
Like they say, the tax tail should not be allowed to wag
the commercial dog!
A : You don't
have to cave in to IR35. You can save the situation if
you are a TRUE enterprise that conducts its operations
like other genuine businesses do. Buy a license to InPractice
IR35 Model Contract package, renegotiate terms and use
it to sign a contract direct with your client. It is not
unusual for businesses to outsource marketing and debt
collection - Satchi & Satchi marketed a political
party in late 90's elections. If an agency is used, buy
the Agency IR35 Model Contract and use it to outsource
the marketing and debt collection. Doing this may be a
culture change (for IT contractors and other One-Person
Operations) and some grafting may be required to rearrange
business methods but then being in business has never
been easy! Businesses need to be innovative. The IR35
hurdle is just another hurdle to clear in business life.
Like they say, the tax tail should not be allowed to wag
the commercial dog!
Q
: Can an unincorporated self-employed person use this
tool?
A : "Unincorporated
Self-Employed IR35 Model Contract", a separate but
parallel product, has special clauses relevant to unincorporated
self-employed individuals and partnerships. In contract
law even one word can make a crucial difference. This
tool is used in the same way as for Ltd Co. It is a similar
product with the necessary clauses and customisation relating
to unincorporated entities.

Q
: Do you offer guarantees like someone who sells similar
but much more expensive?
A : We cannot comment
on behalf of others but just ask yourself how can a guarantee
work for a "disguised employee" given the legislators'
attitude? Do you prefer to spend your valuable work-time
sitting in courts chasing such guarantees? What assets
back up such a guarantee anyway?
InPractice Software on the other hand take a very realistic
view. The licensed user of InPractice Model Contract needs
to assess the situation with the Fact-Find Checklist and
then customise the InPractice Model Contract based on
the overall view of the business situation.

Q
: Is the InPractice package only for IT operations?
A : No,
they are for any one-person operation, including:
- I T Contractors
- Construction Subcontractors
- Medical Freelancers
- Business Consultants
- TV / Film Freelancers
- Accountancy Subcontractors
- Oil industry Freelancers
- Other one-person businesses
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Q
: I find it expensive
to buy InPractice Model Contracts
A : In tax management, the concept of "a contract
is a contract is a contract" does not take one very
far since even one word can make the crucial difference
and the absence of a crucial clause can tip the balance!
When IR35 bites, it can result in a four-figure tax liability
for the taxpayer, and possibly loss of a client for the
accountant. If you open a shop on the high street you would
invest in equipping the shop and so being in knowledge business
one needs to equip accordingly. Buying InPractice Model
Contract has to be an investment decision i.e. will the
tool yield the buyer a profit? The introductory price of
£149+vat (since last autumn) expired when the product was
improved for the Inland Revenue Final Guidelines of 1 February
2000. It is good value-for-money as the professional adviser
can:
(a) charge fees,
(b) retain their one-person clients and
(c) help their clients keep their tax bills in control.

Q
: Would IR35 effectively turn my operation into an employee?
A : The tax STATUS of One-Person Operations at the
present falls into one of the TWO below:
1 - Employment (Schedule E - PAYE) or
2 - Business Profits (Schedule D Case I & II of Income
Tax, whether Co or Self-Employed)
It would appear the tax legislation creates a THIRD TAX
STATUS:
3 - One-Person operations taxed under IR35.
Natural justice dictates that GENUINE BUSINESSES (whether
1-person operations, 2-person operations, or 100-person
operations) are entitled to be taxed as businesses under
Schedule D with or without IR35. Therefore, 1-person operations
genuinely in business should be able to insist on being
taxed under Schedule D.
However, 1-person businesses do need to create documentation
and also operate in the same way as genuine businesses do.
Take a one-person accountancy operation for example: he/she
gets an Engagement Letter (their contract of business terms)
signed direct by his/her client; they do not sign some standard
agreement devised by some agency! So, the One-Person genuine
business should in the same way negotiate terms with his/her
client and have a DIRECT contract. Additionally, the One-Person
Operation may wish to sign a separate DIRECT contract with
an agency to subcontract services such as marketing and
debt collection, albeit on a % basis.
So, if you are a genuine entrepreneur in a risk-taking venture
with the negotiating power to strike a bargain direct with
your client or customer, you need not presume the IR35 legislation
would take over your life. You can buy the license and use
InPractice Model Contract packages.

Q
: How do I keep the AGENCY involved and still avoid IR35
problems?
A :Contracts formulated by agencies would naturally
be drafted in favour of the agency without necessarily addressing
the tax concerns of the IT contractor. The business relationship
between a One-Person Co Ltd and an agency may be primarily
that of paying a % for marketing assistance and debt collection.
That can be catered for by a direct contract between the
agency and the One-Person operation. We sell a separate
"One-Person Co and Agency Model Contract" - see
order form.

Q
: How effective is InPractice IR35 model contract?
A : InPractice IR35 Model Contract is as
effective as the reality of the underlying business arrangements
of the One-Person operation. If the picture emerging
from the answers to the Fact-Find Checklist (provided as
a part of package) shows the overall arrangement is that
of business nature, this model contract should be an EXCELLENT
DEFENCE in normal circumstances. On the other hand, if InPractice
Fact-Find Checklist shows it is that of employment nature,
no high-powered, legalistic, jargon-filled contract with
fancy knobs, bells and whistles or gold gilding can normally
be expected to withstand the Taxman's challenge. It was
decided in Furniss v Dawson that artificial arrangements
(e.g. a Ltd Co of a "disguised employee") can
be ignored if the main purpose of such an arrangement was
to beat the tax.

Q
: Is a non-standard contract (not from agency) the answer?
A: It is normal for independent businesses
to have proper written contracts signed, sealed and delivered.
However, just a non-standard contract in itself is not
the answer. The underlying situation i.e. the terms, are
crucial. That is where the InPractice Fact-Find Checklist
is crucial - it shows weaknesses to renegotiate. IT Contractors
despair too quickly. IT Contractors just need to be entrepreneurial,
which does not preclude using agencies to outsource their
marketing, debt collection, etc. So, each contract for
services needs to be tailored carefully to demonstrate
the terms for that unique situation whereas a standard
contract is just that, standard.

Q
: Not all of my assignments are of business nature
A : You have to "Mix & Match". Assignments
of employment nature should be taken on PAYE basis, whereas
assignments of business nature should be on invoice basis.
Your Tax Return would then declare employment income under
Schedule E and your business profits under Schedule D.
This is where the InPractice package is invaluable.

Q
: Is an assignment lasting more than a month always an
employment?
A : Although architects working at the
Docklands construction had long assignments, it was agreed
they were in business although they worked on one site
with massive equipment not owned by the architects! So,
a long assignment in itself is not conclusive about being
in employment.
In the same way, just being paid by the hour cannot be
the deciding factor. What counts is whether overall it
is an arrangement of business nature.
In Hall v Lorimer, Mummery J made the following comment
which was quoted with approval by Nolan LJ in the Court
of Appeal: "In order to decide whether a person carries
on business on his own account it is necessary to consider
many different aspects of that person's work activity.
... It is a matter of evaluation of the overall effect,
which is not necessarily the same as the sum total of
all the individual details. Not all details are of equal
weight or importance in any given situation. The details
may also vary in importance from one situation to another..."

Q
: What happens when an assignment is extended?
For efficiency,
InPractice IR35 Model Contract uses separate schedules
attaching to the main contract:
Schedule A - Work Specifications
Schedule B - Prices, Fees, Disbursements and Other Charges
Schedule C - Plans, Diagrams, Charts.
When an assignment is extended or the fee structure changes
or extra work is required, as often happens in commercial
life, an additional schedule is signed by both parties
and attached to the ongoing contract. In this way, the
user does not have to create a replacement contract saving
time, cost and effort. This feature helps to make work
life easier, an integral feature of all InPractice Software
products.

Q
: How long has InPractice Model Contract been in existence?
A
: The InPractice Model Contract has been in development
since the tax changes relating to the Construction Industry
Subcontractors - remember those 714 certificates?

Q
: What if the accountant does not have the facility to
get involved?
A
: We shall gladly refer you to an Affilica member who
specialises in this type of work.

Q
: What should an adviser charge for this extra work?
A : Since
this is add-on tax-planning work, the professional
is expected to charge an appropriate fee, something approaching
the fee that a good tax lawyer would charge - around £400
per contract may not be considered an unreasonable
fee.
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