What the heck is IR35?
IR35 is tax legislation that was introduced to stop people trading as limited companies who in HMRC’s view were actually operating as employees and who should be taxed accordingly.
The name IR35 stems from the original press release announcing the new tax rules.
The motivation of introducing this was to tackle tax and national insurance avoidance schemes through the use of intermediaries such as partnerships or limited companies.
When this was introduced it caused great concern among contractors. That’s a polite way of saying it, by the way! A contractor that gets caught out can face serious financial penalties.
To make matters worse, it's not always clear whether a contract is within the IR35 or not. Rather, it is open to interpretation and judged on a case-by-case basis. Very helpful? Not!
If your contract is caught within IR35 income is deemed as salary and income tax and NI contributions are deducted as if you're an employee. You’d typically receive 25% less take-home pay than you would if your contract was outside IR35.
So, what should you do about it?
While IR35 can appear daunting the correct planning and foresight will ensure that you remain outside IR35 and never have to worry. This is very much a pre-emptive strategy.
As a contractor operating through a limited company you must take steps to ensure that you are not caught by IR35 and become the subject of an HMRC investigation.
The main point to consider is the contract you have with the client and you relationship with the client. You need to be able to point to a number of factors that demonstrate you are not an employee but a separate company. These are discussed below.
Areas to consider
In looking at your contract you need to consider both the physical written contract and what's called the notional contract. Eh? Don’t worry, let’s explain:
The physical contract is the written document, which should be well worded in your favour.
But, in addition, HMRC will look at the notional contract -- i.e. the true relationship that is formed between the contractor and the client. This involves looking at what actually happens in the workplace and the day-to-day operations on the job.
Another issue is whether you have a 'contract for services' versus a 'contract of service'. The former is where the client engages your company to provide services to them and the latter is where the client engages you as a named individual to provide the services. Make sure that the former is the case.
You must demonstrate control over your business - i.e. that you are the key decision maker and you decide when to work, how to work, and where to work. Remember, you’re the boss!
Your contract should make it clear that most of the decisions about the service you provide will be made by you; as part of this you should have the flexibility to decide what hours you work, who else from your company can do the job, and provide your own equipment.
The client should have no say in how you perform the work -- that should be at your sole discretion.
Mutuality of Obligation
Say what? Mutuality of who? Actually, this is quite straightforward and is a key test of employment status.
In a normal job your employer is obliged to provide work for you to do and you as the employee need to accept it. There is the expectation of regular employment on both sides until or unless the employee is made redundant or leaves.
For most contractors this does not exist and helps in arguing that the contract is outside IR35. After an initial contract, the contractor should not be obliged to accept another nor the client to offer a new contract or further payment.
When a contractor regularly works with the same client on rolling contracts HMRC will say this suggests employment. If you're doing whatever work is available and not specific project work this makes it worse.
You should be able to demonstrate that you have the right to refuse further work from the client. You should not be obliged to turn up at a client's office every day and should be able to pick and choose what assignment you work on.
Contractors who have multiple clients will be at less risk of IR35 since they regularly accept or refuse work from more than one company. So, if you can, try to avoid to long contracts with the same client. Besides, we wouldn’t want you get bored, now would we!
Right of Substitution
No, this doesn’t mean seeing a half day as half time and substituting yourself with someone else because you’re knackered! Though, that would be nice wouldn’t it!
Rather, if you are providing a genuine service then another contractor with your skill set should be able to provide the same service and take your place.
As part of this you and not the client should have the choice of substitute to ensure that the right of substitution is unfettered and you should be able to control who you substitute.
If you do have the right to replace yourself with another contractor with the same skill set then you're obviously not providing the services yourself as an employee would.
Practically, this is unlikely to happen very often but having this clause in your contract definitely helps.
Employees are protected from financial risk if, for example, a company decides to terminate a project early. In that case an employee would still have his or her job.
However this is not the case for the contractor. In this instance, the contractor's position would be terminated despite the project ending prematurely.
In this case you demonstrate that you are taking the financial risk associated with the work and do not enjoy the same protection as an employee. As part of this, the contract needs to show the price or fee for the work and the date of completion as opposed to simply stating a set number of hours per week for an hourly rate.
Part and Parcel
No, this has nothing do with parcelforce! This means - you need to make sure that you distinguish yourself from a regular employee and can't be accused of being 'part and parcel' of the client's organisation. Unfortunately, there isn’t a clear definition of what this means.
Practically, try not to accept any of the normal trappings of an employee such as:
- A company pass that automatically lets you in and out the building
- Becoming listed in the company telephone directory (like a regular employee)
- Accepting business cards from your clients on behalf of your client organisation
- Being listed on company materials such a brochures or team documents as part of the client organisation
- Being given access to facilities and perks such as a company gym (Let’s be honest, you’re too busy anyway right?).
Obviously, some of these like not getting a pass may not be practical. However, you should be able to point to a list of key differences between yourself and the client's employees.
Other indicators might be: no set hours, no benefits or pensions arrangements and so on.
Provision of Equipment
This test can be difficult since you often will be required to use your client computers and networks. If you can try to demonstrate that you bought your own equipment and that you use this to complete client work. Keeping a record of what equipment you bought and being able to demonstrate how you use it to provide services to your clients will help.
Business equipment includes: computers, software, phone and broadband, office equipment, stationary, and business insurances.
In Business On Your Own Account
You need to be able to demonstrate that you are legitimately in business supplying services via a limited company.
It helps if can you demonstrate activities like sales and marketing, proposal development, and advertising.
Tangible examples of a real business being conducted will include a website, stationery, listings in business directories, advertising in trade publications and subscription to trade magazines. Sorry though, Gardening Weekly won’t count – unless you’re Sarah Beany!
When naming your company avoid using your own name as this clearly impacts the right of substitution. Also, avoid using the word contractor in the title. Besides, John Smith Contracting Limited is very dull and unimaginative. You can do better than that!
Also, attending training courses and subscribing to trade journals will be indications that you are in business for yourself. Never charge any of these back to the client as expenses as this might be used as evidence of you being an employee.
Finally, having more than one client at any one time is a strong indication of being in business for yourself. However this is treated on a case-by-case basis.
Summary - key points & checklist
So, those are some of the key points to consider in relation to IR35. We hope this has helped. To recap, use the following checklist ensure that you put the following in place:
- get your contract right and ensure it is properly worded
- ensure that you are offering services as a company and not an individual -- ensure the provision of substitution
- ensure that you have a contract for a fixed term that is not renewable
- display clearly that there is no mutuality of obligation
- set your own hours of work and ensure that you can determine, for at least part of the time, where you work
- pay your own expenses and factor these into your daily rate
- pay for your own holidays and never accept any holiday entitlement, sick pay or related benefits from the client
- supply your own equipment where possible
Please don't let it put you off or become unduly scared. Simply take the right steps to cover yourself and ensure you stay on the right side of the legislation.
In addition, the new coalition government looks set to replace IR35 with something simpler, fairer and more manageable. However, until they do, better be safe than sorry – as my gran used to say! Here at MyAccountantFriend.com we can advise you and we're always here to help. Please don't hesitate to contact us if you have any questions.
Before we clear up on what an IR35 accountant does in his trade, let’s find out what IR35 actually stands for. This is one of those areas in accounting that everybody tends to shy away from and panic once it approaches. The IR35 legislation was put in to action in the year 2000. It deals with individual contractors as employees of their clients. Before the IR35 legislation was introduced, a company or individual had the ability to avoid paying taxes associated with being paid for their services as a salary. This was made possible by forming partnerships with intermediate partnerships and many other ways. With the introduction of the legislation, contractors had to face quite a few difficulties. For starters, when a service contract is being drawn up or presented to you for signing, it is necessary to find out if it is within the IR35. However, most of the time, the matter is not immediately apparent. Needless to say, if your contract lies within the IR35 income, you will only be receiving about 75% of what you would be paid originally.
An IR35 accountant will help you find out what you can do to keep your income from being deducted as per the IR35. What you need to do to make sure that your contract remains well away from the grasp of the IR35 is often handled by a well versed IR35 accountant. The idea is to keep your company from having to pay the dues of getting in to an IR35 contract and then being the subject of an HMRC investigation. A well qualified IR35 accountant will make sure that you are always able to prove your company as a separate business entity rather than an employee of your client.
Whenever you are drawing up a new contract or going through the pace to renew an existing contract, you need to always try your absolute best to avoid getting hit by the financial impact of IR35. When you are negotiating for IR35 compliance, there are several things that you need to take in to consideration. These factors are what define your strength of negotiation for IR35 compliance. The condition of the market is always a contributing factor when you are attempting to avoid the financial impact of IR35. Certain factors differ according to the situation and it is always wise to have a legal professional to guide you through the IR35 rules as well as the specific contributing factors and the relevant IR35 solutions.
This is where we come in. we provide you everything you need to know about IRSP and its grasp on your financial returns. Our advice page contains everything that is relevant to the subject. Our area of specialization is to make sure that you receive the expected returns for your hard work at all times. Got any queries, unclear areas or just about anything that you would like to know about IR35 rules and IR35 solutions? Then feel free to contact us and to ensure you some much needed peace of mind.