Are you worried by IR35 regulations?
If you are a contractor or freelancer you may be worried about IR35, and how it may affect you. But before you start to panic about getting a massive tax bill you need to understand what the IR35 regulations are and what they mean to you.
Summary of the IR35 regulations
So who does IR35 apply to?
If you own more than 5% of a limited company
a single client contributes 60% or more to your turnover
you have a contract between your limited company and that client
you work in the client premises, using client equipment and under their control
you may well be in ‘disguised employment’ according to IR35 legislation.
How do I know if IR35 applies to me?
This is the biggest problem with the legislation. You can’t be sure if it applies to you or not. There are some tests that are applied by HMRC to help decide if you are in disguised employment or not which includes:
- Do you have a right to substitute yourself for another employee of the company?
- Is there ‘mutuality of obligation’ within the contract?
- Does the client ‘control’ what you do, how you do it, when you do it and where you work?
The Taxman thinks he can generalise about what makes some companies fall within IR35 and others escape it. He has drawn-up a set of business entity tests, complete with a scoring system, to help you judge whether your business would be at high, medium, or low risk of being investigated for falling under IR35.
These business entity tests are not derived from the tax law. They merely represent the Taxman’s view of the risk of a business falling within IR35.
The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. If you choose to use the IR35 business entity tests, you don’t have to declare your score to the Taxman, the tests are merely for your own guidance.
What happens if IR35 shows I am in disguised employment?
You pay more tax. Loads more. And NI too.
You would pay tax as if you were an employee of the client. All the income paid to the limited company from the client would be liable for tax and NI. Obviously this would be far higher than the normal tax rates applied to a limited company with a supplier / client relationship.
You can see the Consequences And Responsibilities Of IR35 Regulations in this post.
Is there anything I can do to prove I am not in ‘disguised employment’?
Yes, several. But the easiest place to start is by looking at what proper companies do. This includes
- Having a company logo and business stationery
- Having a company website that is designed to win work
- Ensure any contact between your company and the clients is written properly
- Use your own equipment
- Work from your own office as well as at he client premises
This is what happened in the Lime IT case where the Commissioner decided that there was a genuine business set up, because the company had its own website and business paraphernalia, business insurance and offered its services as a business to clients. Consequently IR35 did not apply.
Interestingly, amongst other things the Commissioners placed significant emphasis on the fact that the contractor had bought a laptop for use in delivery of the services.
5 tips to keep the tax man happy
Now you know the IR35 regulations I suggest you do the following:
- Get an IR35 ‘friendly’ contract drafted
- Get business stationery and other paraphernalia designed and printed, as Lime IT did
- Like Lime IT, have a website built
- Setup a home office or rent a virtual office
- Get a dedicated business phone number, even a virtual phone number
Why? Well each of these small pieces build up evidence that you are in business for yourself, rather than employed.
But all that stuff costs money?
Yep, it does. But do you know what, the cost of being caught by IR35 is far higher.
Plus all the work will be tax deductible so instead of paying money to HMRC you will be feeding it back into the economy and helping other small businesses. Would you prefer to pay HRMC or help local businesses in your area?
Plus all businesses have running costs so showing that your company pays for things that all other businesses pay for too will also aid your case when it comes to IR35 compliance.
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