Every contractor using a limited company needs to know about IR35.
IR35 is a piece of tax legislation announced in 1999, which took effect from April 2000. HM Revenue & Customs (HMRC) intention was to tackle tax and National Insurance (NIC) avoidance schemes through the use of intermediaries, such as a Limited Company.
All Contractors need to consider the IR35 issue, the application of which depends upon the engagement and the individual contractor’s business. As you would expect, most contractors do not have a strong understanding of employment law and the principles involved, making it very difficult to determine whether you are inside IR35 or not.
The best approach you can take to show you operate ‘outside of IR35’ is to be seen as doing business on your own account. There are a number of ways to do this and we recommend that you have a full review done by an IR35 specialist.
Your IR35 status is not simple to determine because the legislation is hard to interpret and apply. It mainly hinges on two areas;
(1) The written contract – there are various clauses your contract should contain to ensure it keeps you outside of IR35 – if you work through an agency these clauses will most likely be in there;
(2) The actual working conditions – so long as your client treats you like an independent contractor, and that you act like one, then you’re doing everything you can to ensure you stay outside of IR35. This includes things such as not having a business card with your clients’ company details and your name, not being on staff phone lists, not attending staff functions….you are wanting to avoid looking like you are immersed in the clients’ organisation;
The bottom line is you need to act like an independent contractor in business of your own account, and not be seen as a disguised employee.
If your contract and working practice are deemed ‘caught’ by IR35, you lose the ability to take advantage of the tax effectiveness of working through a limited company and must pay the normal PAYE tax and NIC usually only reserved for permanent employees. There are some expenses you can still offset against your company income, but the advantage of operating through a limited company is essentially lost.
IR35 contract reviews
As we mention here, IR35 is a complicated piece of legislation and it is often difficult to get a black and white answer to your IR35 status. We suggest you engage the services of a professional to help you understand your position. IR35 is all about employment law after all and is not a tax or accounting matter.
Some important notes for you
A contract review should not only include a review of the written contract – it is also essential that it includes;
- a questionnaire to pick up your actual working practices
- discussions with the reviewer to clarify points
- a review of all the documents provided with the contract, including schedules, codes of practice, self-billing arrangements, confidentiality requirements etc. Ideally, where there is a job specification, written by the client, this too should be reviewed
The fee for your contract review is tax-deductible for your business;