IR35 In or Out

IR35 will affect your earnings and it should be a major factor in deciding whether you set-up your own one-man limited company or work through an umbrella company. If you choose to set up your own limited, the difference between being ‘inside' or ‘outside' IR35 can affect your net take home pay.

 

There is considerable misinformation in circulation regarding IR35. Here are the top ten myths to help freelance contractors understand IR35, and what it really means.

1. There is a way round being caught by IR35 legislation

The basic premise of IR35 legislation relates to the actual relationship between contractor and client. Any number of dodges, third parties, contractual clauses and representations can't hide the facts.

If the working relationship between contractor and client would be normal employment, if it were not for the existence of an intermediary, then the contract is subject to IR35 and resulting tax and NI payments.

2. Nearly all Contractors are caught by IR35

HMRC will say that most contractors will be caught while others will say that all contractors can avoid IR35. The application of IR35 depends upon the engagement and the individual contractor's business.

Some reports suggest upwards of 50% of contract engagements are legitimately project based and with the right contract and advice the contractor need not be caught by IR35.

3. I can use an IR35 ‘proof' contract approved by HMRC

There is no such thing as an IR35 'proof' contract. Many so-called IR35 'proof' or 'friendly' contracts are drafted without consideration for the real situation or the requirements of clients and agencies.

To avoid the contract or clauses being labeled a sham, contractors should ensure that contracts are professionally drafted, industry specific and truly reflect the relationship.

4. IR35 decisions are entirely based on the contract

This is wrong as HMRC can look at all of the working arrangements. In addition to the contract, the schedule and description of the work will be considered.

Even if the contract contains all the terms associated with self-employment the work undertaken and the contractor's business practices and the actual working arrangements will also be investigated.

5. The Client/Agency contract is not important

This contract is relevant to HMRC and should ideally mirror the terms of the agency/contractor contract. Although the service company is not a party to the client/agency contract the IR35 legislation looks at the commercial relationship between the worker and the end client as evidenced by all of the contracts involved.

• It would be unwise to rely upon the agency as being interpreted as the client in the legislation.

6. All you need to avoid IR35 is to be in business on your own account

This argument, still put forward by some tax advisers, was run in the Tax Commissioner case of Synaptek -v- HMRC. The contractor failed despite there being plenty of evidence that he was in business on his own account.

• Any genuine business could be subject to IR35 if the working arrangements reflect a personal service that would be akin to employment in the circumstances set out in the legislation.

7. A substitution clause is all that is required

A genuine right of substitution is an important factor in determining self-employment status. 

There are important legal distinctions between assignment, substitution and sub-contracting that need to be taken into account and in the absence of actual substitution a clause may not be relied upon to keep the arrangements outside IR35.

8. HMRC has the last word

No - there is an independent tax tribunal (the General Commissioners), who decide the matter on a 'balance of probabilities'. There is a further right of appeal to the High Court on a point of law. What about using an HMRC umbrella company service?

9. IR35 Legislation will be abandoned

The Finance Bill 2000 containing the IR35 clauses has been debated in the House of Commons and was given Royal Ascent on July 28, 2000. This was tested in Court by the PCG in its judicial review. The PCG lost.

The government extended the legislation in April 2003 to apply to domestic hirings. There is little likelihood that this tax law will be discarded. It is therefore important that contractors and accountants are aware of the options available and the best strategies.

10. Composite Companies offer a safe haven from IR35

Most composites could not be described as being in the business of providing services to the contractor's client since they are in business primarily to provide services to the contractor. They therefore fail the "in business" test of IR35.

 

 

The umbrella company service is good news for contractors and takes care of all this complex red tape on behalf of the freelance contractor and do so for a fraction of the price.

Using an umbrella company takes away the stress of being a contractor and makes life a whole lot better.