What you need to know about IR35: Are you an employee or a limited company?
IR35 is one of the most crucial pieces of tax legislation for people who work as a contractor. But how many know exactly what it is and its implications? Assuming that many aren’t aware of this piece of tax legislation and how it will affect their work, in this article you will understand what IR35 is, who are affected by it, how to mitigate the risk involved and whether it applies on you.
What is IR35?
IR35 is a tax law which applies when a worker is hired via an “intermediary” (such as a company or partnership) which in turn is being paid by the customer as if the intermediary is an independent subcontractor, when in reality the worker has an employee-employer like working relationship with the customer. If the intermediary didn’t exist, the worker would have to be taken on as an employee.
IR35 legislation increases the amount of tax and National Insurance the intermediary has to pay and consequently the Revenue investigates businesses looking for cases of non-compliance. Failure to adhere to the legislation can lead to hefty retrospective tax bills, interest and penalties, therefore subcontractors must be aware of when IR35 might apply.
How Do I Know If I am An Employee?
If you are wondering how to determine whether you are considered an employee, simply go through HMRC’s business entity tests, which will assess your eligibility for IR35. While taking the test, you need to assign a score to yourself and keep evidence of your answers. For instance, one of the tests involves making your business more efficient in which HMRC looks for any changes in your business plan and processes and explores whether such changes have been actually implemented or not. The lower your score, the more likely IR35 will apply on you. HMRC also looks for signs that determine how much control you have over your work. For instance, if a client tells you what to do, how to do, when and where to do then it is most likely that IR35 will apply on you. HMRC will consider other factors also before applying IR35 include flexible working hours and if your employees are on your client’s payroll.
We would strongly advise that you obtain a contract review at the start of each contract to see if this is IR35 ‘friendly’.
Who Is Affected by IR35?
For all those individuals and companies that offer services to one or more customers but are treated as an employee of the client, then it is likely you will have to deal with IR35. Keep in mind that IR35 is applicable on project-by-project and customer-by-customer basis. This means that you might end up paying tax for certain clients and not for others and for individual projects instead of the full list of projects.
What if IR35 Applies to Me?
If you happen to be caught by IR35 then you must pay yourself by salary as opposed to dividends (as if you was a full time employee) from your private limited company. The salary paid will then attract NI and Taxes.
Although this is not the most tax efficient way of operating it is possible for you to claim some expenses as well as an allowance. You should check with your accountant as to what this is.
How to Mitigate the Risk?
The suitable way to mitigate risk is by reviewing your business entity tests, getting contract reviews and ensuring your risk is as low as possible to avoid IR35 tax. It is best to draw up a watertight contract for your services so that there is no dispute from the client, worker or third party such as HMRC. Always consult a contract specialist who is aware of IR35 tax and can guide you accordingly.
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