What does the IR35 legislation mean?
IR35 is the common term for the ‘Intermediaries legislation’ introduced by HMRC in 2000. This legislation aims to eliminate the avoidance of tax and National Insurance Contributions (NICs) by contractors and service providers through the use of intermediaries, such as limited companies.
If you provide your own services via an intermediary but work for a client in a way that could be deemed ‘as an employee in disguise’, then you could be at risk of falling within IR35. Essentially, for contractors whose services are employed by a client in ‘off-payroll’ circumstances, they need to ensure that if their services were employed without the existence of their intermediary, they would not normally be classified as an ordinary employee – otherwise they will fall within IR35 and could face tax sanctions.
Simply put, if you ignore the existence of the ‘limited company’ and your contract terms lead to you being classified as an employee of the client (rather than self-employed), then IR35 will apply.
HMRC wants to ensure that only genuine contractors benefit from the tax reliefs associated with this type of employment. With the IR35 tests now superseded, the most effective way to determine whether you are at risk of classification under IR35 when entering a new employment contract is by consulting your accountant.
If you require the assistance of a specialist contractor accountant to determine whether you meet the conditions of IR35, please contact us for a complimentary meeting where we can advise you on the best approach for your business. Alternatively, if you would like more information on IR35, please see the HMRC website.
The tax advantages of running a limited company are dependent on whether you fall within the IR35 rules, so it is important that your status is absolutely correct – if not, many of the benefits of having a limited company may be lost.
Why We Don’t Have an IR35 Calculator
For contractors, one of the most common questions is whether you fall inside or outside the scope of IR35.
Identifying whether you fall inside or outside IR35 is a difficult process, and many calculators that you’ll find online will only give you an approximation. While it can be helpful to get an estimate or ballpark, when it comes to tax, accuracy is preferable. With so many variables to consider, from your business goals to daily rates and all things in between, the best practice for gauging your IR35 status is to discuss your business with a specialist contractor accountant. The Government’s employment status check can also be a helpful tool to determine your status under this legislation.
As always, it is best to get a second opinion on any online ‘calculator’ determination so consulting one of our experienced business professionals is advisable. Our specialist contractor accountants can help you work out the best way to structure and run your business as well as minimising your tax contributions.
Don’t Give Yourself the Benefit of the Doubt – HMRC Doesn’t
The other problem with assessment calculators like this is the tendency for business owners to give themselves the benefit of the doubt when answering survey questions, which often results in biased, inaccurate assessments. A fair assessment means the difference between working inside or outside of IR35, so it’s imperative that you don’t rely on an online calculator and instead seek professional advice tailored to your business and its needs.
Getting an idea of where you stand with respect to IR35 is just one side of the coin. Many contractors assume that in circumstances where a contract is inside IR35, they need to consider working through an Umbrella company. This isn’t always the case, and upon further investigation, you may find that there are several advantages to working through a limited company inside an IR35 bound contract. For instance:
- If you operate on the VAT Flat Rate Scheme, your take-home pay may be higher because of the benefits – unlike an umbrella company, as that scheme isn’t available.
- You only pay tax on 95% of your income in deference to the 100% you’d pay using an umbrella company.
- The fees associated with using an umbrella company can be as high if not higher than those of an accounting firm.
- You can mix and match where contracts are concerned, meaning a contract maybe inside IR35 and another outside of IR35, using the same limited company – giving you both a salary and tax efficient dividends.
Get it Right First Time
It’s important to get this right and pay the right amount of tax, because the tax investigation window can extend up to six years after a return is lodged, so if you are found to have falsely operated outside of IR35, you could be ordered to pay back the underpaid tax or have to pay a penalty and interest.
For a more detailed explanation on IR35 and how it may apply to you, check out our blog post on the IR35 here.
Better still, contact one of our expert IR35 Tax advisors today on 020 8108 0090.
Useful pages for contractors:
- Accountants for contractors
- The benefits of contracting
- Contractor companies explained
- Setting up a limited company
- Limited company management
- Choosing the right contractor accountant
- Setting-up and ongoing accounting packages for contractors
- Tax advice for contractors
- Important dates and deadlines for contractors
- IR35 explained