What is IR35?
IR35 is the United Kingdom tax legislation designed to tax “disguised employment” at a rate similar to employment. It has been reviewed in 2010 and affects all contractors who do not meet HMRC’s definition of ‘self-employment’.
The aim of this 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.
Example of disguised employment: Permanent employee leaves their company on a Friday afternoon then returns to work on the Monday, at the same company, doing the same job role, but as a contractor rather than a permanent employee.
Are you inside or outside IR35?
- Do you provide your services through a limited company?
- If you were unable to provide the services personally, would your company be able to send a substitute with equivalent skills, qualifications and experience?
- Have you ever actually provided a substitute?
- Do you carry out any of the services from your own office?
- Does your company have to work set hours stipulated by your client?
- Other than observing client specifications, are you told how to do the work?
- Do you need to seek permission from your client to take time off?
- Are you obliged to carry out tasks not covered within the scope of your contract?
- Does your notice period exceed 30 days?
- Does your company carry any business insurances? EL, PL, PI.
- Is your company financially liable to correct any faulty work?
- Were you ever a permanent employee of your end client?
- Do you have any line management responsibilities over client staff – appraisals, disciplinary etc?
- Do you have an ‘office holder’ position within the client’s organisation (director, chairman) with high level managerial responsibilities, such as control over budgets etc?
There are only two things to do.
If you feel like you fall in IR35 category, you must act immediately by informing your accountant and registering for taxes as a full time company employee.
If you feel like you do not fall under IR35 legislation and can prove that you are ‘self-employed’, as per the Revenue definition of the term – do nothing.
There still are some benefits in trading through your own Limited company.
If your contract and working practices look like you are inside IR35 you can still claim: traveling and accommodation expenses, 5% of your turnover, benefit from the VAT flat rate scheme saving around £2,000 a year), and receive interest on the funds held within your own company. So yes, from a financial point of view it still could be worth it. Also, any other contract work you do could also be put through your existing company.