What does the IR35 legislation mean?
IR35 is the common term for the ‘Intermediaries legislation’ introduced by HMRC in 2000. The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries.
If you provide your own services via an intermediary (such as a Limited Company) 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. For example, 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.
Essentially, HMRC wants to ensure that only a genuine contractor benefits from the tax savings associated with this type of employment and there are a number of tests they have put in place to help you assess whether you could be at risk.
If you need help to determine if you meet the conditions, please contact us for a complimentary meeting where we can advise you on the best approach for your business. Alternately, 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 as 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.
If you check around the web, you’ll find a vast array of IR35 calculators that attempt to identify whether you fall inside or outside its regime and then how much your take-home pay will be for a particular contract. The problem is though, everybody’s circumstances are different and contracts are different too. Just so many different variables that can affect the outcome, from your business goals to your daily rate, expenses, pensions and capital purchases. So, getting reliable and accurate calculation is very difficult. The government’s own calculator – a downloadable spreadsheet is as good as any. Don’t worry, they don’t track its use!
Go ahead, get a rough idea, but then come back and talk to one of our experienced business professionals who can help you work out the best way to run your business and minimise your taxes – that’s why we are here and we’d love to work with you.
Don’t Give Yourself the Benefit of the Doubt – HMRC Doesn’t
The other problem with assessment calculators like this is that natural human trait to give yourself the benefit of the doubt which could mean the difference of working inside or outside of IR35 – it’s just a shame that HMRC doesn’t do that!
Getting an idea of where you stand on IR35 is just one part of the story. Many contractors assume that just because a contract is inside IR35, they need to consider working through an Umbrella company. Dig a little deeper and you’ll find that there are several advantages of 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 – not so for 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 is 5 years and if you are found to have falsely operated outside of IR35 you could be ordered to payback the underpaid tax or have to pay a penalty and interest.