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Viewing One minute guide to IR35 from 9 IR35 - What Contractors Should Know about IR35 Written by Contractor Supermarket

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One minute guide to IR35

IR35 is an HMRC tax law designed to increase government tax revenues by preventing contractors avoid tax.

Contractors would benefit financially if their contract was outside of the IR35 laws. This is because they could take a proportion of their income as a dividend and so avoid an element of tax.

The IR35 tax law, which has been around for about ten years, now covers most contractors in the UK.

This means that a contractor gets less tax breaks than they used to get before IR35 came into effect.

Contractors now have to PAYE all their contract earnings (apart from legitimate business expenses), which means income tax and National Insurance is payable on 100% of their income.

In order to remain outside IR35 legislation contractors must establish whether they're working as 'self employed' or 'employed' for tax purposes.

An army of lawyers across the UK have been working on this for the last decade.

There have been many court cases brought by HMRC against contractors for incorrectly interpreting the IR35 law.

It is true to say this is both a hotly contested area of tax law and also a very grey area where no hard and fast rules have been established despite the best attempts of the legal profession. Whilst confusion reigns the only winners are the lawyers.

Many within the contracting industry blame the government for badly written legislation which does not clearly and absolutely define what a contractor can, and cannot, do to trade legitimately concerning IR35.

There are too many gaps (as identified by the legal profession) encouraging contractors to think ‘Maybe I'm not caught...' and ‘Maybe I can get away with it...' Because the legislation is unclear doesn't detract from the reason why the law was introduced in the first place, and ultimately the principal behind IR35 remains in force.

As a contractor you can spend thousands of pounds trying to fight HMRC or accept, as most contractors now do, that you must pay your taxes in line with IR35.

Here's a brief way of working out whether you are caught by IR35, and if so using the services of an umbrella company will be your best option. It's by no means comprehensive - for that you'd need to be able to understand complex tax/employment legislation or hire an expert employment lawyer to figure out your tax status.

Though bear in mind this doesn't always guarantee a definitive answer.

IR35 is designed to prevent companies taking on disguised employees. A disguised employee would be an individual who is in every respect working like an employee but trading as a contractor in order for both them and the company to pay less tax.

 

A genuine contractor would work, and be treated by the company, differently to an employee. A genuine contractor would probably have

Their own office

Business cards

Letter headed paper

Accountant/lawyer

Advertise for business

Other employees

You would be running your own small business. Acting as business you could send any of your staff to the client to fulfill the contract - not just yourself! You would also provide your own equipment, like a PC, and turn down any work if you choose.

As a genuine business you would negotiate and be paid in terms of a fully completed contract and not on an hourly rate.

If you make a mistake you would have to correct the errors without incurring further cost to the company.

You have to complete the contract as agreed at the outset, even if you have to work additional hours which would eat into your profit - you may even make a loss.

If this is the way you work then you're likely to be outside IR35 which means a proportion of your income could be taken without being fully taxed. This may mean running your own limited company is your best option. But if you turn up to the client's office and, for example,

Only use their equipment (eg PC)

Have the client's manager check your work and tell you what you should be doing

Cannot send in a different person to do the job

Do the same/similar job to the client's permanent employees

You are likely to be caught by IR35 and have to pay your taxes on the whole of your contract income, the same as most contractors already do.

This is intended purely as an overview of IR35 and in no way meant to be relied on by a contractor determining what tax they should be paying!

It's likely that a contractor will be within the IR35 law, but any contractor who thinks they may be outside of IR35 should consult a specialist lawyer - and this should be done for every contract role, not just the first one.

If you're in any doubt join an umbrella company. An umbrella company is specifically designed for busy contractors who want a tax efficient solution without any paperwork, administration or hassles. An umbrella company has no long term tie-ins and is easy to use.

Visitors who read this article went on to read these articles:

1. Ten myths about IR35
2. The IR35 Test for Contractors
3. One minute guide to IR35
4. IR35 Umbrella Companies
5. Get more out of your umbrella company

 

written on2010-07-29 23:50:06

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