Does IR35 apply to you? This is an important question if you are working as a contractor in the UK. IR35 (otherwise known as intermediaries legislation) was introduced into the UK in April 2000 by the then Chancellor of the Exchequer Gordon Brown and primarily effects contractors who often work through their own personal service company (PSC).
The reason it’s such a big deal is because it can be the difference between paying tax as an employee or paying tax as a limited company. It also removes any ability of claiming expenses.
When IR35 Applies
It’s all about working practices. The tests are various and somewhat confusing, and it seems that even HMRC don’t understand IR35 due to the sheer amount of cases they have lost in this arena.
They have even provided a handy tool to help determine if you are “Inside” or “Outside” of IR35 for tax purposes. Although, the effectiveness of said tool has been repeatedly called into question by contractors and professional bodies alike.
Due to the uncertainty in this area, it has led to many contractors paying much more tax than previously, in some cases up to 25% more!
Criticism of IR35
Tax experts have criticised the legislation as being confusing, poorly administered and unfair. It can cause unnecessary costs and hardships for small businesses that are operating in good faith.
Since the changes that were introduced in the Public Sector in April 2017 it has led to most governmental organisations, such as the NHS and even HMRC making “blanket” rulings to claim every contractor falls inside of IR35. This goes against HMRC’s internal guidance who claim that rulings should be made on a case by case basis.
These rulings were made despite massive outcry and claims of hypocrisy. It has also led to many public sector projects being delayed due to whole teams of contractors walking out.
Many fear that if the same happens in the private sector it could spell disaster for the contracting industry.
Make sure your working practices match your business type
The reality of the situation is that if you are working as an “employee”; you should be paid as an employee, paying the appropriate tax. However, if you are offering your services as a company you should ensure that your working practices match that of a business, not an employee.
Here are a few tips to help you ensure you fall outside:
- Have your contract reviewed by an IR35 specialist such as QDOS.
- Ensure that you hire an accountant that specialises in contracting and can advise you on the same.
- Use your own equipment, such as laptops and software.
- Have arrangements in place to ensure you can substitute your services should you need to.
- Have autonomy about how, when and where you work.
- Make sure that you are not under any type of supervision, direction or control.
- Try to have more than one client at once.
These are just a few things that you can do to help your IR35 status.
If all else fails
Consider using an umbrella company.
Umbrella companies have become increasingly popular over the last year. This is due to the reduction of administration, minimal overhead cost and lack of IR35 issues.
Umbrella companies can be very useful as IR35 cannot apply to you if you are providing your services as an employee.
As IR35 is intermediaries legislation, which attempts to deem the directors of companies as employees depending on their respective working practices. If you provide your services as an employee, IR35 cannot apply to you as there is no intermediary.
You would be an employee already and would be paying the appropriate tax.
If you are interested in finding out how an umbrella may benefit you – we can assist.
All in all, its better to be aware of your working practices and get professional advice to ensure you are the right side of this confusing area of tax legislation.