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IR35 Guide for UK Contractors

 

Meaning - IR35: The Intermediaries legislation was introduced on 6th April 2000. Being inside or caught by IR35 means that for tax purposes one will be judged as being a disguised employee and thus decidedly pay more tax. IR35 ensures that you pay tax similar to what you would pay if you were employed rather than being a contractor i.e. you have to pay additional tax and National Insurance Contributions.

 

The aim of the legislation is to eliminate the avoidance of Tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships.

 

Example of Disguised employment: If a permanent employee leaves the company on Friday afternoon & then returns to work on Monday morning in the same company for the same job position but as a contractor (paid on an hourly/daily rate via invoice) rather than a permanent employee (paid on an annual salary basis).
The aim of the IR35 legislation is to stop people leaving full time employment and then returning to the same job immediately as a contractor working through their own Limited company, in order to reduce their tax liability and their NI payments.

 

If you are inside/caught by IR35 is there any benefit in trading through my own limited company?

 

If your contract is inside IR35, then you can still claim: travelling & accommodation expenses, pension payments, business travel, & medical insurance benefits. There is also a provision for intermediary expenses of 5% of a contractor’s turnover. IR35 workers also benefit from the VAT flat rate scheme saving around £2,000 a year & receive interest on the funds held within your own company. If we look from a financial view-point then it has significant scope. One more important point to be noted is that if there is any other contract/project work you want to do (for a different client) can also be put through your existing company.

 

If you are confused whether your contract falls inside or outside IR35 then please get in touch with us and we will look over it for you.

 

What kind of working practices and contractual conditions are HMRC looking to see if you're inside or outside IR35?

 

IR35 rules & regulations are very complicated, and while the list below is not an inclusive list, it does provide a few pointers to help you get started:

 

Control: The first practice to be taken care of is that will you be able to work under your own control which means that you will not be managed by the client.

 

Financial risk: Although profit share is common place in the employed world, it is without exception in owner managed companies. Also, employees rarely risk financial loss by being employed, whereas if you buy assets such as PC's, laptops, servers, printers, office equipment, or a client fails to pay you as Director of your company you will most definitely experience financial loss.

 

Substitution: There is also a clause in your contract concerned with substituting someone else to perform the tasks that has been contracted to do by your company.

 

Provision of equipment: It is also the question of whether you will be using your own equipment during the contract. In the modern day corporate world this can sometimes be difficult as companies have their own security measures and procedures in place which can include the use of personal laptops/equipment to be forbidden.

 

Right of dismissal: There should be provision in your contract for immediate termination that the client wish to do so. If you have a fixed notice period then the HMRC can and will argue for this being the same as a standard employee contract.

 

Employee benefits: There are several common employee benefits which you cannot claim which include holiday pay, sick pay, pension contributions, training courses, Christmas dinners, the annual staff summer outing, etc.

 

HMRC will not only look at the above considerations, they will review every facet of the contract and working conditions in order to establish if you are an employee or a Director managing & controlling your own Limited company. 

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