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By Lynne Gowers on 13th July 2015
Being a freelancer, you’re generally exposed to greater risk and higher work-related expenditure than your payrolled counterparts. This is one of the reasons you enjoy tax benefits.
It’s also why legislation exists to stop you enjoying those benefits if HMRC believes your status as a Limited Company contractor or freelancer is spurious – or structured purely for tax purposes.
That legislation is IR35.
Introduced in 2000, IR35 was the government’s response to a trend in which employed people left their jobs, only to return days later as Limited Companies. They had the same duties as before – but with new tax benefits.
The fun was short-lived. IR35 empowers HMRC to uncover ‘disguised employees’ and tax them as though they’re on PAYE. It doesn’t prevent you from working through your own Limited Company – but it cancels out the tax benefits if your contract falls within it.
There’s no formal way to check your working conditions against IR35. Until recently, HMRC published the BET (business entity test) on its website. This was a series of questions that would establish whether an employment contract was at low, medium or high risk of falling within IR35.
The problem with the BET is that it had no legal status so, unsurprisingly, few people used it. Accordingly, it was scrapped earlier this year.
Today, HMRC considers three key principles to put employment contracts to the IR35 test.
Does your contract specify that you must do the work yourself, or can you delegate or outsource it to someone else? Ideally, you’ll be able to nominate a substitute to demonstrate independence from your client.
Who controls and directs your work? If you’re being ‘managed’ by your client, your contract may fall within IR35. If, on the other hand, you have autonomy to manage and deliver the work using your own resources, the risk of IR35 is minimised.
If your agreement includes things like notice periods, sick pay, holiday pay and the option of additional work, it’ll start to look like a contract of employment. This would increase your risk of falling within IR35.
Your contract would have to fail all three of these tests for it to fall within IR35. That said, grey areas in agreements, such as needing approval to appoint a substitute to do your work, can lead to a challenge.
Alternatively, ask your Boox accountant for an IR35 contract risk assessment – it’s included as part of our accounting service.
Our guide to closing your business explores some of the options for closing or suspending a limited company
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