WHAT IS IR35 TAX AND DOES IT CONCERN ME?
IR35 is tax legislation designed to tackle tax avoidance by contractors supplying their services outside of employment (e.g. via a Limited Company) but who could be considered an employee by HMRC. If you’re a genuine contractor, freelancer, consultant or interim, you should have nothing to fear from IR35 as long as you understand how the legislation works and ensure it doesn’t apply to you.
HMRC will disregard a formal written contract and will assess the nature of the working relationship to determine if you should be taxed as an employee rather than as a business. IR35 is complex and has been the subject of many high-profile tax cases, and you should talk to us at Piper Hulse at an early stage to seek detailed IR35 advice. As a first step, you should consider the following to gauge your level of risk:
CONTROL
Contractors who are found to be under the supervision and control of their client will likely be covered by IR35 and taxed as an employee.
- What is the scope of the work e.g. is it a predefined project or do what’s required?
- When can the work be done?
- Where is the work done?
- How is the work done and what level of detail is prescribed by the client?
HMRC doesn’t need to show that all of these aspects of control are in effect, it will depend on the role and the strength of the specifics of each case. A good example of this is dealing with unscheduled tasks and the ability of the contractor to determine what needs doing without seeking approval from the client.
SUBSTITUTION
Do you have to do all the work yourself or can you bring in a Sub from the bench? The ability to use a substitute, particularly at short notice, is a very powerful argument against IR35, and more so where the client can’t object to the specifics of the selection process of the person used as a substitute. A subcontractor who has been taken on for specialist skills to complete a project is less likely to be seen by HMRC as an employee.
OBLIGATION
Does your contract look and feel like an employment contract? Examples include; fixed remuneration, working hours, holiday pay, and sick pay. Our friends at HMRC will look at if there’s an obligation between the two parties to provide the work and to complete the work. Genuine contractors shouldn’t expect to receive the security and benefits of employment.
MARKETING
A good indicator of being an independent business rather than a deemed employee is how the business is portrayed. Good examples are marketing material such as; website, business cards, company stationery, advertising and trade listings. It’s worth also considering the business name and what message it conveys to HMRC for example JS Engineering Services Ltd rather than John Smith Ltd.
TOOLS
There are many factors in determining if a worker is inside the scope of IR35 and it’s sometimes the small detail that can swing an argument. Try to avoid the stuff that makes you look like an employee such as; Client email accounts, security pass, client-provided PC, client-provided mobile phones, eating in the staff only canteen, client badged business cards, claiming employee expenses.
Try and make sure you’re not listed in client material as part of the organisation such as; organisation charts, phone/email listings, attendance at corporate events.
IN SUMMARY
If IR35 does apply, you’ll be liable to pay extra income tax and national insurance as if you were an employee, and remember HMRC can go back at least 6 years to look into previous contracts so you could be faced with a hefty bill. If you are a legitimate business you won’t be captured by IR35, but will still face the risk of HMRC investigating your business and this can be stressful and costly.
We understand this process having dealt with it many, many times. Don’t let IR35 tax rules overwhelm you: talk to us now at the outset and we’ll help you review your IR35 risk and will help you structure your business appropriately. If you’d value our honest, professional advice, why not give us a call on 01785 850 060 or pop in to our Eccleshall office to discuss your options: the coffee is on us!