IR35 legislation was first introduced in 2000 to reduce tax avoidance by contractors who HMRC believe to be “disguised employees”. In this time we have had a 100% success rate from dozens of HMRC cases against independent contractors.
In 2017 the rules changed within the public sector, with the onus to prove self-employed status shifting from the contractor to the hirer/ end user. This meant that there were 3 options for the hirer.
· Deem the contractor outwith IR35
· Make the contractor an employee
· Deem the contractor within IR35
The 3rd option being worse case scenario for the contractor when they pay tax and NI as employees without the employee benefits. Due to the risk of mis-identifying a contractor, some public bodies ceased using any limited company contractors.
Move forward to April 2020 where the government plans to use the reforms used in the public sector in the private sector as well. Private sector companies who are not small* will then also need to determine the IR35 status of contractors. It is the end user who will ultimately decide, however agents will be the intermediaries and in some instances indeminfying the end user.
*Small companies must meet 2 of the following conditions:
· Annual turnover must not be more than £10.2 million
· Balance Sheet total must not be more than £5.1 million
· Average number of employees must not be more than 50
If the company hiring you is a small company or you are working overseas then the application of IR35 remains the same.
Calculating the IR35 payment
If it is deemed that IR35 applies to your contract, the end user must deduct tax and national insurance contributions from their fee and pay this to HMRC.
The calculation of the deemed payment on your limited company income for the year is as follows:
Income for the year xxx,xxx
5% Expenses Allowance (xx,xxx)
Deemed payment/ salary xx,xxx
Tax relief on additional allowable expenses will need to be reclaimed on your following tax return.
After other expenses, the above would leave the company with no profit and therefore no corporation tax.
The IR35 determinants don’t change, you have to demonstrate:-
· Independence and not work under the supervision, direction or control of your client
· An ability to provide a substitute to fulfil your contract
· Be responsible to rectify errors at your own cost
· Compliance with the Data Protection Act
· The availability of tools and equipment at your own cost
· A track record of varying clients, contracts or assignments
· Adequate employers liability, public liability and professional indemnity insurances
· A well run company with reserves that are solvent.
The badges of trade are unchanged in 29 years, if you can hold your hand up to most of these then you can assure your customer that you are an independent contractor.
See below for additional tips on how to remain outside IR35.
Additional/ supporting factors
The following points should be read in conjunction to ensure your company is outside IR35:-
· How you are paid –Rather than having set monthly amounts based on a submitted timesheet, raise invoices at stages of the contract with normal payment terms.
· Running as a business – Have your own website/ business email, office space, employees, full insurance cover including public liability, data protection registration. Meet your own costs for training, certification, travel (Even if re-imbursed, pay this through your own company first.)
· Equipment – Use your own equipment, such as laptop (You may have to ensure acceptable security is installed), mobile phone and ensuring this is clear at the stage of agreeing the contract.
· Stationery – Have your own business stationery, business cards in your own company name.
· Remain separate from the End User business – Avoid having a title such as supervisor/ senior which denotes a hierarchy and de-facto the status of contractor within the organisation. Don’t have a set desk, phone extension, business card within the end user offices.
· Financial risk – Contractors should experience a higher level of financial risk than employee’s. If work is faulty or substandard, contractors should put things right at their expense and time.
Review the points above and if they are not in place already, then arrange as a matter of urgency and work with your Agent/ End User to ensure you fall outside IR35.