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The facts about IR35

Thursday, June 9, 2016

A guide for contractors

As a contractor, you’ll no doubt be aware of IR35 to some extent. If you’re confused about what it is, whether it applies to you or its impact on your business, don’t worry – you’re not alone!

IR35 is a complex piece of legislation and many self-employed contractors have been left bamboozled by its finer points. However, it is important that you get to grips with IR35, so here’s a useful guide to the basics.

What is IR35?

IR35 is a piece of tax legislation which was introduced by HMRC back in 2000, to prevent people setting up limited companies to take advantage of the tax breaks, despite doing the same job as their PAYE counterparts.

IR35 is applied on an assignment by assignment basis. Some of your projects and assignments may be inside IR35, while others may not. As a contractor, it’s likely that you’ll work on a mix of project types, and you therefore need to consider IR35 for each of your assignments.

All your contracts should accurately describe the project in question, and detail what will be expected of you during the assignment.

What are the criteria?

HMRC uses a number of different criteria to decide whether a project is inside IR35 or not. These include:

  1. Control

Do you have complete autonomy over the way you carry out your assignment?

If your client has control over the way you work, your project will probably fall inside IR35.

Unsure? If the client wants to check and sign off your work, or asks you to complete tasks which are outside the remit of your assignment, this would be classed as ‘control’.

  1. Mutuality of obligation (MOO)

Do you work on other tasks outside the project?

Relating to the point above, contractors outside of IR35 should only work with clients to carry out a specific task or to complete a set project.

If you’re expected to carry out additional work, outside the project remit, you would probably fall inside IR35, as this is more like a traditional employee/line manager relationship.

  1. Financial risk

Does your business spend money on marketing? Offer compensation in the event of missed deadlines?

If so, you demonstrate that your business is subject to financial risk as a result of carrying out your assignment, and as such you’d fall outside IR35.

  1. Business as usual

Do you receive any employee perks?

Your limited company is a business in its own right, completely separate to your client’s permanent workforce. As such, you shouldn’t receive any benefits given to your client’s employees, such as gym membership, pension schemes or staff parking.

If you do, your position may be classed as ‘business as usual’ which would see you falling inside IR35.

  1. Personal service

Could you provide a substitute to complete the work?

Personal service is a key factor in determining IR35. Your contract is between the client and your company, not you as an individual so you should be able to provide a substitute in your absence. It doesn’t matter if the substitution takes place or not, as long as the client confirms they’d be happy for someone else to complete your duties.

If you wouldn’t have to carry out the work yourself, then there is no personal service element to your work and you would not be viewed as an employee by HMRC, placing you outside IR35.

How can I comply with the guidelines?

  • Keep a list of the ways you fall outside IR35 in your project, e.g.
    • Different treatment to employees
    • Financial risk incurred
    • Substitution agreement
  • Keep a list of contacts for each assignment. In the event of a HMRC inquiry, you should be able to provide witnesses who will state that you were an independent contractor

When IR35 applies

If your assignment does fall inside IR35, you just need to make sure that you pay tax and National Insurance in the correct way. The team at CharterRED can help you understand and fulfil any tax obligations you may have.

Need more help?

The experts at CharterRED have a wealth of knowledge when it comes to IR35, as well as other HMRC legislation. If you’d like some guidance on whether IR35 applies to your contracts, please get in touch.

 

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