IR35 was introduced in April 2000. Understanding IR35, and it’s potential impact on you is now vital for anyone who is likely to be operating through their own Limited Company.
What is IR35?
Also known as the ‘intermediaries legislation’, IR35 was established to combat those who would normally be treated as a full time employee, but who have chosen to supply their services via a personal service company (PSC). Operating in this way enables the individual, in the eyes of HMRC, to falsely make substantial tax and National Insurance (NI) savings.
To be found outside IR35, it will be important for you to be able to show that your operations in the work you complete for your client, are different from that of their full-time employees, both contractually and in practice.
The impact of IR35 on Contractors
There is a significant amount of grey area when it comes to understanding IR35 and its impact on you as a contractor. For more information, check out our knowledge base articles on IR35, but it is your working practices and contracts which will have a much greater bearing on your case should you be investigated.
Ultimately, if you are found to be inside IR35, you will need to pay a lot more tax and National Insurance back to HMRC. Here is the main impact on you.
- Anyone found to fall inside IR35 will be liable for tax a NI deductions on all income payments received from the business, following deductions for expenses.
- Contractor Companies may have a mixture of IR35 and non-IR35 turnover, in which case income and reward associated with unregulated contracts will escape these rules.
- Your normal business expenses should still be claimed as normal through the Limited Company. There is a provision for other intermediary expenses of 5% of a contractor’s turnover.
Remember that if you are investigated by HMRC, each case is unique and with a decision based on its own merits.
How to stay outside IR35
If you’re concerned about if your contract is inside or outside IR35, here’s some pointers to help you ensure you are not counted as a ‘disguised employee’.
- Operate like a ‘business’ – do what you’ve been contracted to do in a proficient manner and follow normal business practices.
- Use ‘badges of business’ – Invest in some stationery and consider writing a plan for how to grow your business. Consider marketing and even creating your own website.
- Review your contracts – make sure your contract clearly sets out the practices of the engagement you’re entering into.
- Can you bring on a sub? – make sure you’re able to send someone to replace you if for any reason you can’t work.
- Think why you went freelance – don’t tie yourselves to individual clients, use your own tech and even consider renting an office space.
If however you remain concerned about your existing practice, it’s best to get professional advice to make sure your contract and procedures are in the right place. We offer a high level review of your contract as part of our contractor accounting service. We can also refer you to other IR35 specialists if the need arises.