It is pretty common knowledge that operating through a limited company results in less tax to pay than being an employee and receiving the same remuneration. The ‘IR35’ (or ‘Intermediaries Legislation’) was therefore put in place by HMRC to seek to distinguish between genuinely self-employed workers, ‘in business on their own account’ and‘disguised employees’ – individuals that are effectively employees but are simply operating through a company to reduce their tax bill.
Most freelance contractors genuinely are self-employed and it is perfectly right and proper for them to take advantages of the advantages a limited company structure offers, in terms of both tax and limiting liability, the rewards matching the additional risk they face by operating as a business would rather than as an employee (for example, no pay if they don’t work, having to rectify any work at their own cost and without pay).
As a contractor working through a limited company arrangement that is not ‘caught’ by IR35, you
can benefit from paying yourself via a tax-efficient mix of salary and dividends and being able to
claim a wide range of expenses incurred against your income, for tax purposes. If you are ‘caught’ by
IR35, this is not allowed and your tax liability will be greater.
You cannot do anything to be considered outside of IR35 as an individual or business – unfortunately, each contract or assignment you/your company undertake(s) can be ruled in or outside of IR35. For this reason each contract must be assessed individually to ensure it is compliant, both in terms of contractual wording and actual working practices.
As with much UK tax law, there is no clear cut definition of what constitutes a self-employed non-caught arrangement from and employed or ‘IR35 caught’ arrangement and the clearest guidelines come from case precedents.
There are three core tests that have been most recently used by the courts to determine IR35 status:
• Personal Service / Right of Substitution: in simple terms, can you provide a substitute to carry out your work, or must you do it yourself?
• Control: in simple terms, do you have control of the method of work by which you deliver the services?
• Mutuality of Obligation: n simple terms, do you have an obligation to provide your services and does your client have an obligation to provide work?
In addition, there are other factors in a contract that may convey the fact that a genuine self-employed business services arrangement, for example the contractor has to provide insurance, their own equipment and training, only gets paid for work done and/or has to remedy any defects or delayed work in their own time at their own expense, as you would expect in a commercial arrangement, rather than an employment relationship.
Unfortunately, these tests and the presence of otherwise of the criteria needed to justify self-employment, are open to a degree of interpretation when it comes to contractual wording, which is why it is always best to get a professional view from a specialist accountant or adviser.