What Is IR35? How Does It Work?

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August 26, 2016
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Contractors are generally a savvy bunch, applying their skills to a project for several months and enjoying the perks of being a mercenary for hire. It’s comforting to know that as soon as one job finishes, another totally different client may be waiting in the wings to pick you up.

However, it’s easy to get snagged on contracts that could bring your status as an independent worker into question, at least from HMRC’s perspective. These stipulations fall under ‘IR35’, and avoiding them should be your priority. Let’s explain what IR35 consists of, including how to dodge its pitfalls…

A line in the tax sands

You know that you’re good at what you do, and that you can successfully assist your clients for a certain time, accepting each job as it comes along. The true status of a lone wolf worker, though, is solidified by your terms of self-employment.

IR35 is the government’s regulatory hurdle that decides whether you’re classed as an independent contractor, and whether you receive the tax breaks associated with it. In essence, it means you can claim expenses back and enjoy lower taxation, thus protecting your earnings.

Contractors must be differentiated from a typical, full-time employee. If you aren’t able to prove to HMRC that your contracting work is temporary, you’ll lose out on these benefits. Since contractors don’t receive the privileges of employment (such as holiday pay), it’s essential to get a handle on your IR35 status, or you’ll be left without any perks whatsoever.

Taking precautions

Unfortunately, the definitions of what makes a ‘genuine’ contractor aren’t always clear. The taxman will be scrupulous about the terms of your service agreement, so it’s important to prove that you aren’t under a client’s direct control.

An example could be checking that your upcoming project has a timeframe that, once completed, severs your obligations to the client. Another piece of supportive small print could be a clause giving you control over how something is done; others include the work itself being described exactly as it’ll transpire, and an agreement that you’ll fix anything that falls beneath certain expectations.

In essence, you have to be critical to the word of every contract you sign, scanning it for elements that don’t hit those IR35 indicators. If you surrender control to the client, you might unwittingly upset your official contractor status. By setting the terms of your temporary hire, you’ll rest easy knowing your rights are secure.

Although IR35 can scare most contractors semi-witless with its many details, there doesn’t have to be cause for panic. Taking on a team of contractor accountants like Bright Ideas removes you from the pressure cooker – we’ll review every contract you throw at us, as well as your tax assessments, with our premium service package.

It’s the stress-free method of protecting yourself from financial penalties you don’t deserve. Call us on 0161 669 4221 or message Info@biaccountancy.com to get started.

Blindfolded businessman walking into the hole

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