IR35 Rules

IR35 is bad news, nobody likes it and HMRC have struggled to apply it for 10 years. IR35 is easy to beat for a well prepared contractor. If you can ‘avoid’ IR35 then you will be thousands of pounds a year better off from your contract. There is loads written about IR35 and complexities and subtleties around ‘substitution’ and something called ‘MOO’. You don’t need to understand it all, you just need to follow some easy steps.

Avoiding IR35 means you can trade as a limited company contractor in the way thousands have in the UK for decades and take advantage of tax planning opportunities. Get a good contractor accountant. IR35 Rule number 1.

IR35 – the basics

IR35 explained by contractor accountants for UK contractors and freelancers. Covering self-employment and IR35 compliance.

What is IR35?

IR35 is a term used to denote United Kingdom tax legislation designed to tax "disguised employment" at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client (end user) via an intermediary (a limited company such as a PSC) and whose relationship with their client is such that had they been paid directly they would be employees of the client.

The stated aim of the measure was to prevent workers from setting up limited companies via which they would work effectively as employees, but saving on tax. The so-called “Friday to Monday” scenario, that it was possible for a worker to leave a job on Friday and return on Monday to be doing the same work for the same company, but, as a contractor via their own limited company paying a lot less tax, was cited in the press release as the anomaly being corrected. In such a scenario, HM Revenue and Customs would be allowed to “look through” the contractual arrangement between the worker’s company and the client company and to formulate a “hypothetical contract” which showed that the worker was a “disguised employee”. The fee paid to the worker’s company would then be taxed as a salary.

Bear in mind it is a 'hypothetical contract' that is assessed and that normal employment status rules (based on case law) should be applied when considering IR35 status. The view of HM Revenue and Customs can, and has been, successfully challenged. The latest case affecting IR35 is the Dragonfly Case.

Being subject to IR35 ("IR35 caught") results in an increased tax and N.I. liability and will prevent contractor companies from retaining profits to grow their business in the future. Those contractors who fall under the IR35 rules will be liable to Schedule E taxation and National Insurance (N.I.), following deductions for expenses. Income will be in the form of a 'deemed payment', following these deductions. Contractor companies may have a mixture of IR35 and non-IR35 turnover, in which case income and reward associated with unregulated contracts will escape these rules.

Normal Section 336 expenses may still be claimed. In addition, there is a provision for other intermediary expenses of 5% of a contractor's turnover. It should be noted that training expenses will not form part of this allowance.

IR35 has been bitterly criticised. The main criticisms are:

• Its complexity and its harmful impact on many small companies which exist for reasons other than tax avoidance or evasion. These include many companies owned by IT professionals, who often have many short-term contracts rather than one steady employment.
• That its effects extend far beyond the Friday to Monday scenario envisaged in the original press release.
• That it is unclear whether IR35 applies to an individual contract or not, and the Revenue will not give an opinion until the contract has been signed. As their ruling can imply significant extra taxation, this means that payment negotiations have to be made in ignorance of the taxation costs involved.
• That it is unjust that workers in small family businesses should be taxed as if they were employed by their clients, yet not receive any of the legal, state and other benefits received by "normal" employees.

Are you 'Self Employed'?

The first and most important point is to establish whether you are 'employed' or 'self employed' under the Inland Revenue definition of the terms. The ambiguity of the 'employment status' guidelines does not help the matter.

It is clearly in all contractors’ interests to be viewed as 'self employed', or at least for part of your income to be IR35-free. If you are able to diversify your business interests, or change your working practices in order to satisfy more of the pointers to 'self employment', your position will be strengthened. For more detailed guidance on IR35 speak to an advisor at Orange & Gold on 0845 272 4009 begin_of_the_skype_highlighting              0845 272 4009      end_of_the_skype_highlighting

So, are there IR35 rules? Well, not really, but certainly some fundamentals to consider:

• Get a good contractor accountant. (Orange & Gold has never lost an IR35 dispute!)
• Get your contract reviewed by experts before you sign it.
• Get unacceptable clauses in your contract negotiated out where they will expose you to IR35 risk.
• Ensure that the working practices will reflect the wording in the written contract.
• Ensure that you are seen as independent of your client business and that you do not become part and parcel of your client’s staff base.
• Move contracts as often as possible to show a lack of dependence on one client.
• Ensure your business is run efficiently and taxes are paid correctly and on time.
• Take advantage of tax breaks such as VAT flat rate scheme savings and ‘income splitting’ with spouses.