IR35 Guide

A Guide to IR35

If you are working as a contractor, you’ll need to be aware of an important piece of tax legislation, IR35.

As experts in accountancy solutions for contractors, we have a wealth of experience in helping people just like you to navigate through the complex world of tax. In the paragraphs below, we have constructed a comprehensive, straightforward breakdown of IR35 and what it could mean for you. For more information on our services, call our expert team on 020 7481 4743.

IR35 was introduced in April 2000 to tackle what HMRC see as disguised employment. In a nutshell, permanent employees were leaving their company only to return a few days later in the exact same role, but as a contractor rather than a permanent employee. As a result, such people would be able to take advantage of the tax saving benefits that are available to contractors, whilst not actually operating as one.

IR35 aims to prevent people from leaving full time employment only to falsely operate as contractors.

What you need to know about IR35?

If your contract is caught by IR35 it can mean having your take home pay reduced by up to 25, so it’s important to understand the most important features of the legislation. Don’t worry, at Contractor Accountants Online we can arrange IR35 checks on contracts, so you can rest assured that if there is a chance of your contract being caught by IR35 you will know about it.

Essentially, if your contract contains the same level of risk, control and responsibility of that of a permanent employee, there is a high chance that you could be classed as inside IR35. Consequently, you’ll be required to pay full tax and national insurance on your earnings, instead of a combination of a salary and dividends from your company’s profits. The reason for this is that HMRC take the approach that you aren’t exposed to the same financial risks as a contractor working through a limited company, and as such you aren’t entitled to the same corporate tax benefits.

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Is your contract inside or outside of IR35?

If your contract is deemed to be inside of IR35, your taxable income will be the same as a permanent employee’s. Therefore, it is common for contractors who are inside IR35 to operate through an umbrella company, though you could still set up a limited company if you prefer (only 95% of your income would be taxable with a limited company as apposed to 100% through an umbrella company).

20% of contractors in the UK are currently operating inside IR35, so it’s perfectly feasible. That being said, it is more tax efficient for contractors if they are able to work in a contract that isn’t caught by the legislation for the reasons we have already mentioned.

There are a number of factors that determine whether your contract is inside or outside of IR35, these include:

  • Control – do you work under your own management or does the client take an active role in managing you.
  • Right of dismissal – do you have a fixed notice period? If so, HMRC could argue that this is an attribute of a permanent employee and not a contractor.
  • Employee benefits – do you reactive benefits such as a Christmas party and holiday and sick pay?
  • Financial risk – what is the level of financial risk that you are exposed to and do you receive any form of profit sharing?

Please be aware that this is by no means a comprehensive list, HMRC will check everything so make sure you read the next section carefully and get your contract reviewed by the professionals.

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