IR35: it’s likely that as a contractor, you’re all too familiar with the legislation. But do you know just what it is, what it means to be inside and outside of IR35, and how being inside could impact your contract? We’ve answered all with our guide.
What is inside and outside IR35?
Essentially if you have the same benefits and responsibilities as a permanent employee, then you would more than likely be classed as inside IR35 (caught by IR35). Some of the key factors that determine if you’re inside or outside IR35 are right of substitution, mutuality of obligation, and control.
It is best to remember that unless HMRC decides to open an IR35 investigation they will not want to see your contract, however, it is important that your working practices must reflect what is in your contract. You’ll also need to be aware that you’ll read all sorts of information about IR35 and urban myths are common, many of which aren’t true, so it is always best to seek professional advice.
As you might have heard there is much controversy over the implementation of IR35. Primarily because there’s no clear definition of what an employee is, so we need to rely on case law. Each contract and its circumstances differ wildly so we’ve created the table below to indicate what helps or hinders a contract in an IR35 assessment.
What is IR35?
IR35 is a piece of tax avoidance legislation that came into effect in 2000. It was designed to ensure that contractors working as disguised employees paid the same tax as an employee.
For example, an IT worker may resign from their permanent role on a Friday but return on Monday doing the same job, at the same company, at the same desk with the same manager. The only difference is they are now doing the job as an IT contractor working through their own limited company.
What does it mean to be outside IR35?
Due to the increased work, risks and responsibility, there are certain tax advantages of working through your own limited company. For example, dividend payments (profits taken from your company) through a limited company do not attract National Insurance contributions. These benefits offset the fact that you wouldn’t be able to enjoy all the standard employee perks such as holiday pay, sick pay and pension contributions.
However, if your working practices are viewed to be too similar to a permanent employee, (receiving sick pay, the level of control and responsibilities, for example), then it’s likely that your contract will be classed inside IR35.
Some of the key factors that determine if a contract is inside or outside IR35 are:
- Control – how much control do you have over the work you undertake?
- Financial risk – to what extent are you personally liable if anything goes wrong?
- Substitution – can somebody else be hired to perform your duties if you’re unable to?
- Provision of equipment (sometimes, especially insecure sites you may have to use a client-side-equipment) – how much of your own equipment do you purchase and use for a contract?
- The right of dismissal – are you employed on an ongoing basis or will your contract finish as when the work is completed?
- Part and Parcel– are you treated the same as any permanent employees?
You can find more about HMRC’s IR35 determining factors here.
If your contract is deemed to be inside IR35, it effectively means that you are treated as an employee of your client and are liable for PAYE tax. When you work inside IR35, you will lose some tax benefits, such as taking dividends and access to a number of expenses.
Much of the above will be detailed in your contract. However, it is best to remember that although it’s possible that HMRC may want to see your contract, your working practices must closely reflect what is outlined.
Download your IR35 guide
We are here to help you unravel the mystery of IR35. Our free comprehensive guide to IR35 covers everything you need to know.
What’s inside the guide?
- What is IR35? – why was the legislation introduced and what does it mean.
- How is your IR35 status determined? – the factors used to assess your status.
- What to do if you’re inside IR35 – working tax efficiently and what it means for you.
You should also be aware that you will read all sorts of information about IR35 and urban myths, many of which aren’t true. So it is always best to seek professional advice. Due to changes in legislation, it’s important to remember that the information you read could be outdated.
When it comes to IR35, it pays to be sure. Entrusting your limited company to dedicated accountants like SJD Accountancy means that there’s someone by your side to guide you through the maze of legislation and help you to stay compliant. To find out more about how you could be impacted by IR35 and to discuss our contract review service, get in touch with our team of experts.
It’s also worth noting that even if your contract is caught inside IR35, it may still be beneficial for you to work through your own limited company. An accountant can help to advise you about any potential tax benefits available to you. If you’re concerned about what this could mean for your business, you can visit our page to working inside IR35 for more information about the benefits of operating through your own limited company.
How to be sure your contract is outside IR35
The best way to get certainty for your contract’s IR35 status is to undertake an IR35 review.
This will determine whether your contract falls inside or outside of IR35. And if it’s likely that it will be deemed inside, the reviewer can make practical suggestions about how to structure your business.
Another effective way to help you stay protected is to enlist the help of a specialist accountant. An accountant can provide ongoing support when it comes to structuring your working practices, can deal with HMRC on your behalf and can offer you invaluable insight.
Interested in better understanding your IR35 status?
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