'IR35-friendly' contracts could mean jail

Employers and IT contractors risk criminal charges if they try to get around Inland Revenue tax rules by drawing up 'IR35-friendly' contracts.

IR35 was introduced in 2000 to close a loophole which allowed IT contractors to effectively work as full-time employees of one of their clients, while being taxed at lower contractors' rates. Contractors body the Professional Contractors Group has already lost an appeal against the ruling as have individual contractors.

But employment law experts are warning that those who collude in designing contracts that give the impression the worker is a genuine contractor are breaking the law and face unlimited fines and a maximum of seven years in jail.

Kevin Barrows, partner at law firm Tarlo Lyons, said: "If the contract doesn't reflect your company's actual relationship with them and if you dress things up in a way that doesn't reflect reality you are in danger of being guilty of a criminal offence." He admitted that the Revenue does not have the resources to crack down on every contractor but said it would look to name and shame a high-profile offender.

"It will look for a big name like a big bank or telecoms company to act as a deterrent so beware of having things designed to pull the wool over the Revenue's eyes."

Jonathan Armstrong, recruitment manager at global engineering consultancy Atkins, told Silicon.com IR35 is still the biggest issue for HR departments dealing with IT staff.

"We have a lot of people who consider they are contractors. In reality they haven't woken up and smelt the coffee."

Ann Swain, chief executive of IT recruitment industry body the Association of Technology Staffing Companies (ATSCo), also warned businesses and contractors not to get caught out.

She said: "There are two contracts; one between the agency and the contractor and one between the agency and the end-user. Both need to reflect the reality of what is happening in the workforce."

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