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November 30, 2014

An introduction to IR35

IR35 is tax legislation first introduced in 2000, which affects freelance contractors. IR35 is more properly known as the ‘Intermediaries Legislation’. Since April 2000 contractors have had to determine whether or not each contract could be perceived by HMRC as ‘disguised employment’. The original stated aim of the measure was to prevent workers from setting up limited companies via which they would effectively continue to work as employees of their former employer, now their client, but saving on taxes. This is known as ‘Friday to Monday’ contracting. But the application of IR35 is far wider than this minority scenario.

IR35 is now a significant concern to most freelance contractors. Unfortunately, there is no way to determine for certain whether or not a contract is subject to IR35 unless a dispute between a taxpayer and HMRC reaches the courts. The best way to defend an IR35 position is to avoid it becoming a dispute in the first place by taking the necessary preventative measures. We can advise you on this.

A contract that is subject to the higher IR35 tax regime is referred to as ‘IR35 caught’. A contract that is not subject to taxation under IR35 rules is referred to as ‘outside
IR35’. The objective is to prove that a contract is outside IR35 and, therefore, you are able to draw dividends from the profit of your limited company. Dividends are more flexible than salary and do not attract national insurance deductions. Consequently the net income from your contract is considerably greater.

How do I avoid IR35?

In order to avoid IR35 you need to be able to prove that you are genuinely self-employed and working in business on your own account. This sounds straight forward, but, in fact, the distinction between employed and self-employed for contractors under IR35 is grey.

To avoid IR35 successfully you need a specialist contractor accountant to guide you.



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