In April 2000 the government announced the introduction of the IR35 legislation. This piece of legislative function was to eliminate the avoidance of tax and National Insurance contributions (NIC) through the use of a Personal Service Company (PSC) where an individual worker would, for tax and NIC purposes, be regarded as an employee of the client.
If you and your company are deemed to be operating inside IR35 then there are potential implications and legalities that will need to be adhered to. We have provided guidance on both operating inside and outside of IR35 to help you make a more informed decision before you accept your next contract.
Operating inside IR35
From time to time you may take a contract that due to the nature of the work or the working practices of the client falls inside the IR35 legislation. However, this can still be a more financially beneficial option than working under an Umbrella provider or returning to PAYE employment.
The benefits to operating inside IR35 through a limited company are as follows:
- You only pay tax on 95% of your income, rather than 100% of your income under an Umbrella company. HMRC provide a 5% allowance which is intended to help with the running costs of the business.
- If registered under the flat rate VAT scheme then your take home pay should be considerably higher due to the flat rate benefit. Click to download Exchequer Accountancy Services guide to VAT.
- Umbrella company’s fees can be just as much as limited company accountants fees, if not more.
- Contractors can make use of wider employment schemes, such as the home office allowance, cycle to work scheme, child-care allowances, etc.
- You can run concurrent contracts under the same limited company that may be outside of IR35 so you can earn both a salary and a more tax efficient dividend.
For more information on IR35 please see: Exchequer Accountancy Services guide to IR35.
Operating outside IR35
In order to operate outside of the IR35 legislation, you need to be able to prove that you are working independently through your limited company. Unless you have evident autonomy within the role as a contractor, i.e. the client has no real control over your contracted duties then it is unlikely that you will fall outside IR35.
A contract for services can be written to fall outside IR35, however if it doesn’t accurately reflect your working practices then it really isn’t worth the paper it is written on. For example, if a substitution clause has been included in the contract, but in reality you don’t know anyone that could be sent in your place, the clause in the contract would have no impact on your IR35 status. HMRC would actually review your working environment and practices so a contract with conflicting terms wouldn’t even be taken into consideration in an IR35 case.
If it is ruled that you have been falsely operating outside of IR35, you would be forced to pay back all the previously underpaid tax, a penalty of similar value, and interest for the time you have held onto the additional funds.
The investigation window is 5 years and HMRC can look into your accounts at any point within this timeframe. The moral of the story is to only operate outside IR35 if you are absolutely certain of your IR35 status.
It is important that you get all contracts / working practices reviewed by Exchequer Accountancy Services to ensure that you are operating outside IR35. We are here to help so please call us on 033 3323 1199 and talk to your personal accountant