IR35 is every contractor’s worst nightmare! It is a piece of legislation that is universally hated by everyone in the contracting sector and it has been since its introduction in 1999. But for anyone new to contracting what is it and what does it do? In a nutshell, IR35 gives HMRC the power to change the tax status of contractors from limited company contractors to regular employees (for tax purposes) if it thinks they are gaming the system. Obviously, for anyone this happens to it can be a massive shock and have a seriously negative effect on their contracting income. Why does HMRC do this? Blame the 90’s! The legislations whole purpose is to try and combat what HMRC describes as ‘disguised employment.’ In the 1990’s it was a popular tax strategy for highly paid company employees to cut their tax bill by changing their job description to ‘consultant’, quitting their employment and then claiming to be
The legislations whole purpose is to try and combat what HMRC describes as ‘disguised employment.’ In the 1990’s it was a popular tax strategy for highly paid company employees to cut their tax bill by changing their job description to ‘consultant’, quitting their employment and then claiming to be self-employed, all the while working for their old companies still. IR35 was brought in to eradicate this practice, which it mostly did, but unfortunately, it also caught a lot of innocent contractors in its very wide nets.
What Is The Financial Impact Of IR35?
Well, it’s not fun. Any contractor who finds themselves falling into IR35 will immediately see their take home pay plummet by up to 24%. That’s because they will not only pay higher tax and NIC’s but also they will not be able to take advantage of the usual allowances and expenses that they can use when working for their limited companies.
How Do I Know If I Am Inside IR35?
This is one of the chief grievances of most contractors. It is not always that easy to determine if you are likely to be caught up in the IR35 trap. However, there are certain common mistakes and situations that will normally cause a contract to sit within the IR35 framework:
– This is the main issue and the first thing HMRC look for. As a contractor, you need to ensure that you are choosing your own place of work and your own hours and the method that you use to do your work. If a contract requires you to work set hours on set days, or simply requires you to work when the client asks you to work, then you are seriously risking being within IR35. – More Information
– You should also ensure that there is no mutuality of obligation. What is mutuality of obligation? It is what you get with an employment contract. Under employment contracts, employers are obliged to provide employees with work and employees are obliged to do that work. If a mutuality of obligation then you will almost certainly fall within IR35.
– The contract should contain a right of substitution. If the contract names you as the sole individual to do the work then it is more likely to fall within IR35. On the other hand if it contains a clause that substitution is allowed (and another contractor can complete the work) then it is more obvious that a service is being paid for, not an employee.
What Can I Do To Ensure I Stay Outside IR35?
The most important thing you can do to avoid IR35 is make sure the contract is drafted extremely carefully. The contract needs to make crystal clear that the client will be paying for specific tasks and should include a schedule of works. As mentioned above it should contain no mutuality of obligation and should contain a right to substitution. There should be no mention of regular working hours and no mention of supervision or direction.