Understanding IR35 and its potential impact on you is vital for anyone that’s likely to be operating through their own Limited Company.
What is IR35?
This legislation was put in place by HMRC to establish the true nature of contractor employment and whether it is a genuine business to business relationship or one of “disguised employment”.
Operating in this way enables the individual (in the eyes of HMRC) to falsely make substantial tax and National Insurance (NI) savings. You need to assess each contract to decide if it is caught by IR35 or if it is outside IR35 to know how you can take income from it.
If you are 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.
How does IR35 impact Contractors?
If a contract is caught by IR35, you’ll need to pay a lot more tax and National Insurance to HMRC. Here’s the main impact on you:
- Income earnt on a contract caught by IR35 will be liable for tax and NI deductions on the majority of income, following deductions for certain expenses.
- You can deduct 5% of the income to cover administration expenses (such as insurance, accountancy fees, IT, training, and telephone).
- In addition to the 5% you can claim computer, direct training, pension and certain travel and subsistence costs (the same ones you would be able to claim if you were an employee of your client).
- Contractor Companies may have a mixture of IR35 caught and IR35 not caught contracts, in which case income and reward associated with the different contracts will need to be split and treated differently.
Remember, if you are investigated by HMRC, each case is unique and with a decision based on its own merits.
How do I stay outside IR35?
If you’re concerned about whether your contract is inside or outside IR35, here’s some pointers to help ensure you’re not counted as a “disguised employee”:
- The first point is your contract – what rights does it give you, your agency and your client. Does it determine you as an employee? (this is a complex legal area).
- Does the way you operate match what the contract says?
- 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. Make sure your online profiles, such as LinkedIn, makes it clear you operate your own company (and does not imply you are an employee of your end client).
- 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.
For more information on IR35, check out our comprehensive guide.
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.
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