Have you ever found yourself feeling slightly dazed and confused about IR35 legislation? If so, you’re not alone! The IR35 is a difficult topic to get to grips with for many contractors and entrepreneurs, so it’s about time we put together a straightforward, no-nonsense idiot’s guide to this piece of legislation, to allow you to stay out of financial difficulty.
The legislation was introduced back in 2000 in early April. At the time, the UK ir35 rules launched by the government were intended to stop individuals from leaving their jobs on Friday before coming back to the office the following Monday in the role of a contracted ‘consultant’, thereby enjoying tax relief benefits while still receiving the standard employee benefits. This sort of ‘disguised employment’ was a massive problem in the 1990s, and the IR35 was meant to render the widespread issue redundant in the workplace.
Unfortunately, things didn’t exactly go to plan!
Since the introduction of the IR35, numerous sole traders and limited companies have found themselves falling unwittingly foul of the legislation, perhaps as a result of their business practices not closely matching those of contractors in the same industry, or perhaps as a result of failing to produce accurate documentation of their business practices for an official HMRC investigation.
Let’s take a look at the aspects HMRC may investigate in order to check whether or not you fall outside IR35:
Financial Risk: It is a rare occurrence for permanent employees to put their finances at serious risk. It therefore makes sense that, In order to be outside IR35, you need to prove that you’re at financial risk. Let’s say, for example, that a client fails to pay you on time. As a contractor, this places you at financial risk and this is something you need to prove.
Company Benefits: All contractors falling outside IR35 will not be entitled to company benefits such as holiday pay, pension contributions, sick pay, or training courses.
Control: Are you in control of your daily work schedule? Can you clearly demonstrate this? You’ll need to be able to if HMRC start prying.
Company equipment: The company equipment debate is a bit of a grey area, as some clients do not allow personal laptops to be used due to security fears. It is, however, something to keep in mind.
Performing Your Task: The IR35 rules state that there should be a clause in your contract that disallows any other person from performing the role you’ve been hired to perform by any given company.
Dismissal period: If you have a set notice period in certain industries, HMRC might consider this asking to the rules that apply to a permanent employee. As such, many contractors have immediate terminations written into their contracts. This might seem like a bit of a negative point, but think positively; this could turn out well for you if the company hiring you turns out not to be the best to work for!
It is worth remembering that there are significant advantages to keeping within IR35 as a contractor. For example, you will be able to enjoy tax relief by claiming business expenses, with the aim being to help develop your business for the future while improving the services you have to offer potential clients.
One thing to bear in mind, though: you need to keep receipts as evidence of all the expenses incurred during your work contract. HMRC are within their rights to ask to see all records dating back as far back as the last six years, so don’t be too quick to throw those flimsy bits of paper in the bin!
Claiming expenses if you own a limited company is quite a straightforward process. Any expenses claimed must be for your business, which can cover aspects such as travel costs, overnight accommodation, meals consumed away from your place of work, pensions, and training courses.
Meanwhile, if your contract falls within IR35, bear in mind that the only expenses you can claim are admin costs, fixed at 5% of your contract income, travel and accommodation expenses, pension contributions.
Being a full time employee brings with it its own benefits, but contracting through your own limited company or setting up as a sole trader can also bring with it some serious advantages. The IR35 rules may well be open to interpretation due to a couple of grey areas, but a good contractor accountancy will be able to clarify any confusion for you. Some accountants will even offer a verbal review free of charge in order to encourage you to call back with other issues and requests for services.