IR35 plays an important role in the lives of many of our contractor clients.
If you are a contractor then you need to be aware of this legislation as the cost of getting it wrong can be vast.
At A4C we have composed this IR35 Guide to help you understand how the rules may impact your contracting career.
What is IR35?
IR35 is properly known as the Intermediaries Legislations.
Introduced by the Chancellor of the Exchequer, it was intended to counter tax avoidance by the use of so-called personal service companies (PSCs). The aim was to prevent workers from setting up limited companies through which they could work as an employee whilst saving on tax.
What do HMRC look for?
They look to see if there is a hypothetical contract in place between the hirer and the PSC enabling disguised employment.
How does HMRC decide if a contract falls within IR35?
There are a series of employment status tests to see if your services have been engaged in a genuine self-employed capacity.
Can you hire someone else to do the work at your own expense?
Do you risk your own money?
Do you provide the main items of equipment for the contract?
Do you agree to undertake the contract for a fixed price regardless of how long the job may take?
Can you decide what work to do, how and when to do it and where to provide the services?
Do you regularly work for a number of different clients?
If you make a mistake do you have to correct unsatisfactory work in your own time and at your own expense?
If you can answer yes to the following questions then you should be fine, but may want to seek advice to be on the safe side.
Should you worry if your contract falls within IR35?
Operating through a PSC is not illegal and you can undertake contracts which fall inside IR35, but if you do you must pay full tax and national insurance.
Recent publicity surrounding ‘off payroll’ payments within the BBC, the student loan companies and service providers to the London 2012 Olympics means that the focus is back on IR35. HMRC frequently asks are these individuals genuinely in business of their own accord or simply using these payment vehicles to avoid their full tax and NI obligations?
Do HMRC undertake investigations?
In recent years HMRC has raised a number of IR35 challenges, although it is well know that they have won very few. Most likely because of the legislation being poorly written and hard for courts to apply.
As a result of this there has been significant investment in the way IR35 investigations are administered and therefore it is important that contractors know what IR35 is, whether they are caught by this legislation and the impact it could have, as the chances of winning future reviews are expected to swing significantly in HMRC’s favour.
On a positive note, HMRC has acknowledged that there is a lot of uncertainty in the contracting sector surrounding IR35. They agree that it is clear who definitely falls outside of IR35 and those who definitely fall inside IR35 but there is a huge grey area in the middle.
In the 2012 budget the government announced that measures would be developed to improve IR35 and as a result new guidance is being given to help contractors identify if their contract is high, medium or low risk. These bands are defined by new Business Entity Tests, there are twelve in total each awarding different scores:
- Business premises
- Professional Indemnity Insurance
- Previous PAYE
- Business plan
- Repair at own expense
- Client risk
- Right of substitution
- Actual substitution
The scoring system tells you which band you fall into:
- Less than 10 points – High risk
- 10 to 20 points – Medium risk
- More than 20 points – Low risk
So let’s think about what you need to get that peaceful night’s sleep…
You can score a lovely 10 points if you have business premises which are not at your home or the client’s premises. It doesn’t matter how swanky your barn conversion or German huf house is, if it’s at your home address you don’t get the 10 points. Rent a desk in a serviced unit with supporting evidence to prove it and the points are all yours!
You can score 10 more points if you were unable to recover funds for work completed within the past 24 months. This bad debt should be around 10% of your annual turnover. This one seems a little strange because if you manage your contracts professionally and only take those contracts you consider to be ‘good payers’ then you wouldn’t qualify for these points. However if you frequently get asked to leave contracts for poor performance followed by unpaid invoices then you can assume you’ve got these points in the bag!
There are 2 points available if you invoice for your services and negotiate payment terms.
And so the list goes on…
A low risk rating by HMRC will give you a 3-year period of grace, assuming you told the truth and don’t change the business model. You can obtain this formal rating by having your contract reviewed via the IR35 helpline and contract review service.
The lesson to learn from all of this is that HMRC do not say that hirers cannot engage contractor’s services ‘off payroll’; they accept that there is a valid need across the public and private sector. Their concern is simply that the PSC’s are legitimate and organised formally.
For more information visit http://www.hmrc.gov.uk/ir35/ or give us a call o: