All professionals looking to enter the world of contracting must be aware of IR35. This HM Revenue & Customs (HMRC) legislation is central to how much a contractor earns and failing to adhere to it could lead to costly fines and further investigations from HMRC.
What is it?
IR35 legislation is a tax rule that ensures freelance workers cannot avoid paying significant amounts of tax and National Insurance Contributions (NICs).
Such avoidance was previously possible through a loophole in tax law and IR35 was introduced in 1999 to prevent it from happening.
Under the IR35 legislation, contractors must now prove they are ‘self-employed’ as defined by HMRC regulations. Those who do not meet HMRC’s definition are affected by IR35.
HMRC now also has the power to investigate all contracts that were established after April 2000. Contractors could also be liable to pay back taxes if past contracts are found to have breached IR35 regulations.
How does it affect me?
In short, IR35 determines how much tax you pay through your job status. As a contractor you may immediately think “I am self-employed”, but IR35 works on an assignment basis. What this means is that your status could change from project to project. If you suspect your assignment falls within IR35 you must declare it.
The nature of this rule means, as a self-employed contractor, you must remain vigilant when declaring your assignments to HMRC. It is always better to declare something even if it does affect your gross earnings as a result.
Those who fall inside IR35 will be liable to pay increased tax and Nl contributions. Normal expenses may still be claimed.
Can I avoid it?
Generally contractors fit into one of two categories when it comes to IR35: you will either be ‘inside’ or ‘outside’ its regulations. Which one you are placed in is determined by the status of your contract. If you are engaging in a contract of service you will be classed as employed and therefore within IR35. A contract for service means that HMRC classes you as self-employed. In this instance you will outside the legislation and IR35 will not apply to you.
IR35 cannot be fully avoided and all contractors must be aware of it in order to ensure they are adhering to its regulations. There are, however, certain ways in which a contractor can choose to deal with IR35.
A contractor who works through an umbrella company, for example, does not have to worry about IR35. By using the services of an umbrella company, a contractor is technically classed as a full-time employee, which brings you within IR35 legislation. This eliminates some of the hassle related to IR35, as you will not have to worry about the status of each individual contract.
Some umbrella companies also have dedicated teams who deal with IR35 legislation and these experts can offer advice regarding the rules.
Alternatively, contractors could enlist the services of a specialised IR35 accountant to ensure they are compliant. This can be an effective, but costly way to monitor your contract’s IR35 status.