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If you are a contractor the single biggest potential hurdle to your future prosperity comes in the form of the Intermediaries Legislation, or ‘IR35’.
This particular piece of tax legislation, which is named after the Inland Revenue press release that first, announced the Government’s plans to clamp down on ‘disguised employment’, was implemented in 2000. It was met with much hostility and is still as controversial today as it was when first introduced.
Before IR35 was created, the number of contractors working via their own intermediaries (personal limited companies) was rising at a rapid pace. Limited company owners can enjoy a number of tax benefits, which are not available to permanent staff. The main benefit is that no National Insurance Contributions (NICs) are payable on company dividends. Traditional workers have to pay income tax and NICs on their entire salaries.
The Government at the time believed that many limited company professionals were, in fact, ‘disguised employees’, who provided services to their clients in the same fashion as normal employees, and not in the manner of typical ‘self employed’ people who used their own limited companies.
This resulted in introduction of the Intermediaries Legislation to tackle cases of disguised employment. If a person’s contract is deemed to be caught by IR35, the vast majority of their salary will be subject to standard PAYE income tax and NIC rules. The potential tax loss is quite significant.
If you are selected for an HMRC IR35 compliance check, both the wording of your contract, and the way you actually carry out the contract (your working practices) will be examined to determine whether you are ’employed’ or ‘self employed’ for tax purposes.
There are a large number of factors to consider when creating the overall picture of a contractor’s employment status. The key question HMRC asks is: "Would the individual be an employee were it not for the existence of the intermediary (the limited company)?”
Some of the main pointers include:
Alongside these, and other factors, the actual way you perform your contract duties should also demonstrate that you are not a ‘disguised employee’.
These IR35 rules can seem daunting to new contractors, however an entire industry has evolved since the year 2000 aimed at protecting contractors from the IR35 trap. You can assess your IR35 Status here
If your contracts are caught by IR35, the financial consequences are significant. For example, a typical contractor on £350 per day, working 44 weeks per year, could be over £8,000 worse off if caught by IR35.
The autumn 2017 budget saw the Chancellor announcing a number of changes to the IR35 legislation that will continue to affect contractors into 2018. These include:
The responsibility of assessing IR35 culpability will shift from the contracted individual or public service company through which the individual is provided, to the public sector employer, agency, or third party that is engaging them. This will probably mean that when taking on public sector contracts there’s likelihood that more rigorous checks will be applied to ensure compliance. This shift is also expected to be applied to private sector engagements in the future.
If your contract was caught under IR35 then when calculating your tax and NI payment you would only have to actually pay 95% of the amount, the remaining 5% being deemed to be tax free to cover any unspecified business expenses. This 5% cover has now been abolished. This has been linked to the shifting of the burden of deciding whether IR35 rules apply away from the contractor.
One of the key factors you should consider when choosing an accountant is their knowledge of legislation and issues of particular relevance to the contracting industry.
Accounting for limited company directors who are caught by IR35 is straightforward, but what you need is a specialist accountant to proactively offer help and advice on how to determine your IR35 status prior to starting a new contract.
In the first instance, before signing a new contract, you (or your accountant) should send it to an employment status specialist who will be able to advise you on your IR35 status, and ultimately how to comply with the IR35 rules.
An IR35 contract review service will tell you whether or not the contract falls within the IR35 net, and if so, you will be provide recommendations on how the contract should be amended to make it “compliant”.
An additional safeguard is to consider taking out a tax investigation policy. This type of insurance will cover the costs of professional representation should HMRC decide to investigate your IR35 status, and the more comprehensive policies may also cover any unpaid tax liabilities you may be deemed to owe following an investigation.
Several specialist contractor insurers can offer IR35 insurance.