Contractors' Questions: Should I have an IR35 war chest?

Contractor's Question: I have been contracting at the same end-user for more than 2 years, and intend to continue. I had my contract professionally reviewed and was pleased to learn it was outside IR35. Now after 2 years, due to a range of factors that have not escaped the firm that initially reviewed my contract, there is a good chance that I would be found inside IR35 should I be investigated tomorrow.

However I've estimated that the liability I could be risking each year is about 7-8% of total revenue, so could I not simply leave this amount in the company and pay it out (to HMRC) in the event that I am investigated and caught by IR35?

Also, if I have 6 months on the bench for whatever reason, and I use the set-aside money to pay myself my salary during those 6 months, would that help my position because I'd be paying PAYE and employers NI; albeit during the months AFTER the contract formally ended?

Expert's Answer: Rather than rely upon there being a "good chance" that this engagement will be found to be inside IR35, I would recommend seeking an expert opinion on your IR35 status over the entire period i.e. each contract and extension and renewal together with the working practices for each period.

It is only then that you can establish the potential liability and it may be that things are not as you believe. It could be that your working practices have changed since the contract began.

IR35 debts are subject to interest and now also to penalties with penalties potentially rising to 100% of the debt. However these can be avoided providing you have taken "reasonable care" to establish your IR35 status. Having your contract reviewed demonstrates reasonable care and should protect you from penalties.

The debt is usually a company one and you can use any funds (often called a 'war chest') to pay it. However having 6 months on the bench paying a salary after the contract has ended will not alter in any way your IR35 position for the earlier period. In summary seek expert advice, establish your risks and then put in place your contingency plan so you can have peace of mind.

The expert was Kate Cottrell, a former Inspector of Taxes and co-founder of Bauer & Cottrell.