While our attention here at Relevant Life Expert is mostly focused on tax-savvy life insurance for Contractors we also want to help Contractors in the wider challenges they face. In our daily conversations with our contracting clients we’ve learned that, beyond protecting themselves, IR35 is one of the biggest challenges they see as needing to be overcome. As a result, we’ve taken it upon ourselves to give you an overview on how to best tackle IR35. Hopefully, by the time you’ve read to the end, IR35 will no longer be the headache it currently is.
What even is IR35?
IR35 is a piece of tax legislation that HMRC introduced in April 2000 in order to combat the problem of ‘disguised employment.’ They found that workers were supplying their services to clients via an intermediary like a limited company as a way to avoid tax when, actually, if it were not for the limited company status, the worker would be considered an employee.
What are the implications of IR35?
Unfortunately, despite being considered a poorly conceived law by many tax experts, IR35 can cause real problems for small businesses. Essentially, if you are considered to be acting within IR35 by HMRC you will have to pay income tax and National Insurance as if you were employed. In some cases this has meant a reduction in a Contractors net income of 25%, costing some thousands of pounds.
However, it’s not all bad. If you are a genuine Contractor it is simply a case of taking time to understand how the IR35 legislation works and how you can apply best practice so it does not apply to you.
What can you do to avoid being caught within IR35?
If you have come under an IR35 investigation from HMRC they will run a fine tooth comb through your business and working life - even a sizeable chunk of your home life. They’ll be looking for evidence that suggests you are not a business in your own right and rather a ‘disguised employee’ of the client. One of the first places they’ll look is at the contract drawn up between you and your client. With that in mind, ensuring the contract drawn up between yourself and your client is IR35 savvy is one way in which you can protect yourself from being caught within the legislation. Remember, if you are a genuine contractor, you shouldn’t have a problem - it’s just a case of understanding the key indicators that ensure you are able to evidence that you are operating outside of IR35.
What to consider when working with your client to avoid being caught inside of IR35
- If the contract drawn up between yourself and your client is a template or not accurately reflecting the engagement you are undertaking, HMRC will spot it
- Has your client been found by HMRC to use ‘disguised employees’ before? If so HMRC will have a close eye on their contracts
- How much control does your client have over your work? The greater the control (evidenced in your contract) the more likely HMRC will be to determine it inside of IR35
- Are you allowed by your client to send a replacement to deliver the contract? If you are not, this suggests to HMRC that you are an employee and operating inside of IR35
- Is the client obliged to give you work and are you obliged to do the work? This indicates ‘mutuality of obligation’ and places you inside of IR35
- Are you using your own equipment to deliver your services to the client? If you’re client has required you in the contract to use their equipment onsite then this, alongside other evidence, could be seen as an indicator of operating within IR35
How to tackle IR35
It is important to bear in mind that there is rarely one reason that HMRC has considered a contract to be within IR35. A tax inspector is likely to come to a conclusion based on a body of evidence. The best way then, to protect you standing with HMRC and remain outside of IR35, is to ensure that, with every contract you embark on, you take a free and online IR35 test. It’ll ask you a number of questions which will determine your status and, if you are inside it, it will provide you with an opportunity to set it right (this is a paid service).
To do this, we wholeheartedly recommend visiting IR35testing.co.uk every time you draw up a contract with a new client or visiting our partner, Contractor Calculator, where you’ll find an extensive range of resources on all things IR35.