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When IR35 was introduced by HM Revenue and Customs (HMRC), it was intended to combat tax avoidance by setting out rules by which self-employment would be defined by the department. The aim was to ensure that contractors were not taking advantage of the tax benefits of being self-employed, which are designed to offset some of the risks and costs of operating in this way, whilst enjoying the security of permanent employment.
Despite the purposes of the ‘intermediaries legislation’ being to clarify the employment status of those who could potentially be taking advantage of the tax system, the question of whether or not someone’s working practices come under IR35 or not are not always as clear cut as one might hope. One of the most concerning elements to the legislation is that many people believe that they are genuinely self-employed, but could find out if investigated, that HMRC consider them to be inside IR35.
One of the key factors which HMRC will look at if they are trying to ascertain your employment status is the kind of relationship you have with your client. They will look at both the current contractor-client relationship and any pre-existing relationship between the two as well. This means that if you have previously worked for your client as an employee then you will need to prove a significant change in the nature of your role and the way it is carried out to avoid this being considered a major pointer towards ‘false self-employment’.
An arrangement which appears to be designed to avoid PAYE tax on the part of the contractor and National Insurance contributions on the part of the client will be viewed unfavourably by HMRC. This is considered disguised employment and, in the context of an arrangement that is already questionable, will usually be considered to be an attempt to avoid tax on the part of both parties.
Whilst HMRC will not make a decision based on their assessment of a single aspect of your employment arrangements, the various elements that they consider will be weighted when it comes to how important they are considered to be in the overall picture. One of the major considerations will be the nature of your employment arrangements, particularly in terms of whether you are providing a service or a skill. When a contractor operates as a limited company, it is the companythat is engaged rather than the individual. This means that, in their capacity as a company director, a contractor should be able to send a substitute to complete any work they are undertaking if they are truly working outside IR35.
This may not be practical or even advisable, depending on how much you rely on your business’s reputation and whether you can find a reliable substitute for your own skills, but it shouldn’t be specifically precluded by any clauses in the contract between the client and contractor.
A client wanting to ensure that you don’t work for anyone else might seem like a positive comment on your work, but any contracted exclusivity will be considered a pointer that you fall inside IR35. Being able to conduct your business for as many clients as you choose is a significant part of running your own business, and any agreement with a client that limits that will be considered a sign that your employment contract will fall inside IR35. Even if your contract is a 9-5 one, you should still be able to pursue any other work of your choice in the time outside your contracted hours.
If your client offers you training in order to complete your job, then it is worth negotiating a payment to them to cover the costs of the training in order to demonstrate that your relationship is not equivalent to an employer-employee one.
Many of the factors which will be taken into consideration when ascertaining your IR35 status are actually a matter of good business practice as well. Relying on a sole client for your income can be risky, as can failing to ensure that you have appropriate professional indemnity and liability cover, and these are all true whether you are concerned about your IR35 status or not. Promoting yourself through a well-maintained website, purchasing and maintaining any equipment you need and generally conducting yourself as a business will all contribute to the bigger picture of your working practices.
Most limited company contractors benefit from operating in a manner that indicates that they are outside IR35. Marketing your company, working for more than one client and keeping your training and skills up to date are all good practice for making a success of your limited company. Although you cannot exclude yourself from IR35 just by ‘appearing’ to be independent, managing your business effectively will benefit you as well as helping to demonstrate your IR35 status.
If you are concerned about your IR35 status, then it is best to speak to a qualified professional about your specific situation in order to get specialist advice. Ultimately, HMRC will have the final decision over how they view your employment situation, but a specialist accountant can help you to determine the likelihood of being caught under IR35 as well as providing you with invaluable advice about a range of other elements of working for yourself. Some people work on a mixture of contracts, including those that bring them inside IR35 and others for which the legislation does not apply. To keep track of your tax and National Insurance obligations, most people find it helpful to use an accountant who is experienced in the legislation to ensure that they are not over or under-paying on either.
IR35 has been described by experts as some of the most confusing legislation around, and there are still some queries over various interpretations of its details. Trying to understand it all yourself whilst maintaining your career as an independent professional is a daunting prospect.
Because all our accountants are specialists in dealing with the finances of independent professionals, we know all the ins and outs of the system, so we can help you to decide whether you want to work through your own limited company or use an umbrella company, whether or not to register for the Flat Rate VAT scheme and what you can claim by way of expenses.
For more information on how we could help you, call us today on 01253 362 062