30th July 2018
While our attention here at Broadbench is mostly focused on Contractor mortgages and protection we also want to help Contractors like yourself in the wider challenges you face.
In our daily conversations with Contractors we’ve learned that, beyond protecting yourself, IR35 is one of the biggest challenges you need to overcome in your work. As a result, we’ve taken it upon ourselves to give you an overview on how to best tackle IR35.
IR35 is a piece of tax legislation that HMRC introduced in April 2000 in order to combat the problem of ‘disguised employment.’ They found that workers were supplying their services to clients via an intermediary like a limited company as a way to avoid tax when, actually, if it were not for the limited company status, the worker would be considered an employee.
Unfortunately, despite being considered a poorly conceived law by many tax experts, IR35 can cause real problems for small businesses. Essentially, if you are considered to be acting within IR35 by HMRC you will have to pay income tax and National Insurance as if you were employed. In some cases this has meant a reduction in a Contractors net income of 25%, costing some thousands of pounds.
However, it’s not all bad. If you are a genuine Contractor it is simply a case of taking time to understand how the IR35 legislation works and how you can apply best practice so it does not apply to you.
If you have come under an IR35 investigation from HMRC they will run a fine tooth comb through your business and working life – even a sizeable chunk of your home life. They’ll be looking for evidence that suggests you are not a business in your own right and rather a ‘disguised employee’ of the client. One of the first places they’ll look is at the contract drawn up between you and your client. With that in mind, ensuring the contract drawn up between yourself and your client is IR35 savvy is one way in which you can protect yourself from being caught within the legislation. Remember, if you are a genuine Contractor, you shouldn’t have a problem – it’s just a case of understanding the key indicators that ensure you are able to evidence that you are operating outside of IR35.
It is important to bear in mind that there is rarely one reason that HMRC has considered a contract to be within IR35. A tax inspector is likely to come to a conclusion based on a body of evidence. The best way then, to protect you standing with HMRC and remain outside of IR35, is to ensure that, with every contract you embark on, you take a free and online IR35 test. It’ll ask you a number of questions which will determine your status and, if you are inside it, it will provide you with an opportunity to set it right (this is a paid service).
To do this, we wholeheartedly recommend visiting IR35testing.co.uk every time you draw up a contract with a new client or visiting our partner, Contractor Calculator, where you’ll find an extensive range of resources on all things IR35.
While the above provides a brief overview of what IR35 currently looks like and how to tackle it, it’s true that IR35 could be set to change as early as next year, with the implications on Contractors like yourself being significant.
For context, HMRC introduced a ruling for the public sector in 2017 called ‘off-payroll rules.’ The off-payroll rules determined that,
“Contractors earning over £219 per day and/or on contracts lasting six months or more must work through a Cabinet Office process to show public sector clients that the off-payroll rules don’t apply to their contract. If the off-payroll rules are found to apply, then the contractor must either go onto the client’s payroll and have income tax and National Insurance Contributions (NICs) deducted at source under Pay As You Earn (PAYE), operate inside IR35 or resign the contract.”*
According to Contractor Calculator, HMRC is likely to enforce this off-payroll ruling to the private sector in 2019, with the implications for Contractors including:
With that in mind, ensure you keep up to date with all IR35 changes via communities like Contractor Calculator; that way you’ll be confident you’re prepared for any changes HMRC introduce.
*Quote taken from this page on 30.07.18
All content is accurate at the time of publication