How Does IR35 Affect You?
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What is IR35?
Introduced by the previous Labour administration in April 2000 to close an alleged tax loophole, IR35 legislation has acquired certain notoriety amongst many freelancers. Why should a measure aimed at preventing tax avoidance have acquired such a reputation?
At that time, HMRC claimed that some contractors were practising a form of “disguised employment,” leaving their job as, for example, an IT technician on Friday afternoon and returning to the same firm on Monday morning, often doing the same work, only this time as a contractor rather than as an employee. Switching over to self-employed status had important implications for the amount of tax and national insurance contributions (NICs) due: the self-employed generally pay lower NIC charges to employees. HMRC began to grow concerned that it was losing out on important revenue on the basis of unscrupulous practises by contractors spuriously claiming to be self-employed but in reality doing an identical job for the same company. IR35 rules were devised to prevent this.
Problems with the rules soon began to emerge, however; they encouraged a form of “groupthink” on the part of HMRC, who began to presume guilt rather than innocence on the part of the UK’s 1.4 million entirely legitimate self-employed contractors. In reality, only a small proportion had knowingly behaved in this way. But this trend was undoubtedly exacerbated by the use of exceptionally ambiguous and unclear “employment tests” by HMRC to determine whether or not an individual was self-employed. The result was the introduction of a huge amount of uncertainty in the contractor marketplace.
Does it Affect you? IR35 Factors
You will be affected by IR35 legislation if you offer services through an “intermediary” rather than as a sole trader; typically, this means that you are providing your services through a limited company in which you are a shareholder with over 5 per cent of the shares and you pay yourself through dividends.
It’s as well to be aware of what exactly an “IR35 factor” is though, if you want to be as sure as possible about your status. These factors are components of the employment tests HMRC uses; if present, they make it likely that you will fall within the remit of the legislation. One of the key factors is whether you provide a personal service or whether you have the right to appoint someone else to do the work on your behalf; but there are others, too.
You’re likely be considered an employee if you’re paid by the hour, week or month; if you are eligible to overtime pay; if you work for one client at a time; if your tasks, work schedule and work methods can be directed by someone else; and if you work at locations decided upon by the client. Alternatively, if you’re self-employed, you’re likely to be able to decide on how the work is done; have more than one client at a time; be required to redo unsatisfactory work at your own expense and in your own time; and provide your own equipment.
An Effective IR35 Solution
One of the most successful and popular IR35 solutions for those who wish to avoid confusion over their status is to conduct freelance contracting through umbrella companies rather than limited companies. Essentially, umbrella companies act as employers to contractors who have obtained fixed contract assignments, most usually through a recruitment employment agency. The contractor will be paid by the umbrella company on a PAYE basis, with expenses such as meals, accommodation and travel allowances offsetting some of the income (this makes it a more tax and NIC efficient option).