IR35 has been receiving increased press coverage at the moment, for example the news about Ex-BBC Look North presenter Christa Ackroyd facing tax bill of £420k, which your can read on the BBC website, here, http://www.bbc.co.uk/news/uk-england-43074584
What is IR35 and how does it effect a contractor?
IR35 is tax legislation that was introduced in 1999 and is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC).
‘Disguised employment’ is the term used to reflect these types of engagements’ It was used to save the engaging client tax and NIC but importantly, but it also restricted employment rights and benefits such as holiday entitlement or notice periods.
If you are a genuine contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to fear from IR35. This is so long as you take the time to understand how the legislation works and apply best practice to ensure it does not apply to you, and have a defence prepared if investigated by HMRC.
How is IR35 status tested then?
If IR35 status is ever queried by HMRC, they will look to prove the engagement is one of a ‘disguised employment’ if they deem the contract to be ‘within IR35’
When negotiating a position, special consideration should be given to both the contract and the actual working practices.
There are 3 principal tests of employment that can be considered? These are
- Control: what degree of control do you have over how, when and where the services are provided.
- Substitution: if you are unable to provide the services yourself, can you send a substitute and are there any restrictions by the client or agency.
- Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work and you are obligated to accept it. This can be during or after the contract.
There are additional factors that can support the principal tests, such as:
- Requirement to maintain adequate business insurance throughout the contract.
- A responsibility for repairing defect work at your own cost and in your own time.
- A responsibility for providing training and equipment in relation to the services provided.
How can a contractor prove they are not within IR35?
To prove to HMRC that a contractor is not within IR35, you need to look at a list of the differences between the contractor and the client’s employees.
As the contractor is not an employee, there should be some fairly obvious differences, such as set hours, benefits, pension arrangements, access to social clubs, parking, expenses arrangements, use of a subsidised staff canteen and so on.
The contractor will also be able to demonstrate that they are not part and parcel by referring to correspondence with the end user client that shows clearly they are not under the control of the client’s project manager.
A further step can be to prove that the contractor is in business for themselves. This can take the form of marketing materials, such as:
- A website, company stationary, business cards
- Listings in business directories, offline and online
- Advertising in trade publications
Another point is in the naming of the limited company. Contractors should avoid using their own names as it can imply they are only providing their own services, which can fall into the HMRC’s definition of a personal service company (PSC). U
Contractors who can show they have bought their own computer and office equipment, software licences, business insurances and have also kitted out an office, even if it’s at home, will also be demonstrating they are running a business.
By the very nature of contracting it is frequently not possible to run concurrent clients. However, evidence for this is on a case by case basis.
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