What is IR35?
IR35 is a legislation introduced by the Government in April 2000. It is designed to target workers who operate through their own limited companies but act like and are treated like employees by their client.
By working through a limited company and paying dividends, contractors save up to 26% compared to the take home pay of an employee. Therefore HMRC want to ensure that anyone operating in this manner is doing so legitimately, i.e. they are genuinely in business on their own account.
HMRC can carry out an ‘IR35 enquiry’ into a contractor, where they will carry out a detailed investigation of an engagement. If at the end of the enquiry they decide that you are ‘caught’ by IR35, they will demand that you pay back all tax and National Insurance they would have paid had they been permanently employed – plus interest and a possible penalty.
What is the risk, financially?
The table below gives an indication of what your IR35 liability would be, based on your daily rate. Note that this calculation does not include penalties.
Please contact us if you would like a tailored liability calculation.
What do HMRC look at?
HMRC will scrutinise the written contract between your own company and the recruitment agency (or client if you are going direct). Unfortunately it doesn’t end there; they will then look at the reality of the engagement, i.e. how you operate as a business, how your work is carried out and how your end client treats you. IR35 enquiries can last for months – or years in many cases. It’s important to note that HMRC can go back 6 years to look at previous engagements, so even contracts that have long finished still pose a risk. IR35 largely revolves around three main areas:
- Personal service & substitution – your limited company has been engaged to provide the services rather than you as an individual. Therefore you should be able to use any representatives providing are suitably qualified and experienced to successfully complete the project. If you are unable to provide the services yourself, you should be able to send a suitable replacement and you should remain responsible for successful completion of the work. This is called a right of substitution.
- Control – as an independent contractor you should have autonomy over how, when and where the services are provided. Parallels can be drawn with engaging a builder to work on your house; you tell them what you want doing, but how they actually get the work done is up to them. Naturally the nature of some projects – such as working on an offshore installation – mean that the location and perhaps hours of work are inflexible. This isn’t necessarily a problem, but it is vital that the method of work is not dictated by the end client.
- Mutuality of obligation – this often causes confusion amongst contractors and HMRC alike, but ‘MOO’ boils down to having no obligation to provide ongoing or continued work. An employee would have to accept any work provided, whereas a contractor is not obliged to accept any new work after a project has finished. You should ensure that your contract has a clear end date and that you are able to terminate the contract early.
In addition to these three key areas there are numerous other factors that can affect a contractor’s IR35 status. These include:
- Taking a financial risk
- Being in business on your own account
- Not being ‘part and parcel’ of the client’s organisation
- Not being tied exclusively to the one client
What can I do about it?
It is important that contractors are prepared for an HMRC enquiry as it can be a daunting experience. Follow the steps below to ensure you are fully equipped should a letter arrive on your doorstep:
Step one – book a free consultation
We can offer a free IR35 telephone consultation to contractors, whether they are existing clients or not. Either call us on 0845 582 9000 or email us at email@example.com.
Step two – get your contract reviewed
The first port of call for HMRC is your written contract, so it’s vital that the terms and conditions are IR35 compliant. If the contract contains clauses which point to employment rather than self-employment, HMRC will focus on them and it can be very difficult to disprove. A contract review will analyse every clause in your contract to ensure it is as good as possible from an IR35 perspective. Your actual working practices will also be reviewed in detail to ensure the opinion is based on the entire situation. If the review finds any problems with your contract the majority of agencies are amenable to changes, particularly if the request is via a reputable expert. A full review via FW Accounting costs £99 + VAT. Contact us here for more details.
Step three – get insured
If you are faced with an IR35 enquiry you do not want to be alone. The legislation is complex and a successful defence relies on expert representation. FW Accounting clients who have the standard insurance package will benefit automatically from tax enquiry insurance, meaning experts Qdos will handle any HMRC investigation from start to finish. Qdos also provide a policy which covers all liabilities if you are caught by IR35. FWA clients who already hold tax enquiry insurance as part of the above scheme can purchase this additional policy with a discount of £120. Simply enter your unique FW reference number on checkout. Contact us for more details.
Step four – build a business
Some of IR35 is common sense and relatively minor details can aid your case. For instance, holding business insurance (Professional Indemnity, Public Liability etc) is a key pointer towards being in business on your own account. Also consider things like a company website, letterheads and business cards. If you can demonstrate to HMRC that you have invested time and effort in running and promoting your business it should stand you in good stead.
Step five – ensure your accountant is clued up on IR35
Your accountant should be fully aware of the IR35 legislation and should be able to provide basic advice if necessary. FW Accounting work very closely with Qdos, who are one of the UK’s top experts in status issues. We are therefore able to quickly advise clients if there are any changes or updates that they need to be aware of. Contact us for more details.