If you’re considering a career in contracting there’s plenty to get your head around. From getting in touch with potential new clients and figuring out how you’d like to work to choosing how you’ll trade and what your company name will be.
At Intouch, your dedicated Contractor Accountant is on hand to offer help with your company set up and walk through all the decisions you need to make, but it’s still a good idea to gain an understanding of some of the key pieces of legislation that affect contractors – one of which is IR35. So what actually is it and how does it affect you?
In this blog Neil Kellaway, our Operations Manager explains what IR35 legislation is, how it affects your take home pay and what changes are on the horizon.
What is IR35?
IR35 is tax legislation introduced by HMRC to combat tax avoidance by contractors who supply their services to clients/hirers via a Limited Company, who would otherwise be an employee. You might also hear these types of contractors described as ‘disguised employees’.
In short, IR35 rules stop contractors from claiming all the benefits of being self employed through their Limited Company, when they’re effectively reaping all the same perks as permanent employees, but paying less tax.
Why is IR35 important to contractors?
If you’re caught ‘inside’ IR35 you’ll end up paying more tax, which effectively will decrease your overall take home pay.
If found ‘outside’ IR35 you’re able to split your income between salary and dividends, which effectively allows you to keep your National Insurance and tax contributions at a minimum. You’re therefore able to earn more than a permanent employee on the same base level pay as you.
How are you found ‘inside’ or ‘outside’ of IR35?
HMRC have set out a number of rules which both your contract and working practices must satisfy in order to be found ‘outside’ IR35:
Personal service/substitution – If your Limited Company is able to provide someone to carry out your contract’s required services in place of yourself, this would strongly suggest that you are operating outside of IR35.
Control – The amount of control your client has over your working practices will have an impact over whether you’re found ‘inside’ or ‘outside’. If you’re in charge of when, where and how you complete the contract, you’re less likely to fall inside IR35.
Mutuality of obligation – Employees are expected to work certain times and days, and employers are obligated to pay you even if you’re sick or on annual leave. If there’s a higher level of obligation from the hirer it implies that IR35 might apply.
Public vs Private contracts – both now and in the future
Public contracts – if you accept a contract from within the Public sector, it’s the responsibility of the end-hirer to decide your contract’s status, and then inform the ‘fee payer’ (often the supplying agency) whether your contract should be paid net or gross.
Private contracts until April 2021 – if you accept a Private contract prior to April 2021 your IR35 status is your responsibility to determine. Get it right and you’re able to enjoy all the benefits of being truly ‘outside IR35’, but get it wrong and you’ll bear the tax risks as previously discussed.
This is where the help and support of your IR35 expert Contractor Accountant comes into play, to help you determine the correct IR35 status for your contract and working practices.
What’s going to change in April 2021?
Absolutely nothing for Public contracts, but for Private, change is on the way…
HMRC has decided to match the rules for Private to those used for Public, meaning that as of April 2021 all contracts IR35 status’ will be determined by the hirer, without any decision from you. This also means that any associated tax risk with misidentifying your status will now also lie with the hirer, taking you completely out of the equation.
For more detailed information on these changes to IR35 and how you could be affected, take a look at our blog: Changes to IR35 come April 2021.
You’re never alone when it comes to IR35
Whilst IR35 legislation can seem daunting, remember that whilst you need to have an understanding of what it is and how it affects you, it’s your Contractor Accountant’s job to ensure you’re fully supported, giving you expert advice and knowing everything there is to know about IR35.
That’s where Intouch’s unique IR35 guidance services come in. Our expert team offers unlimited contract and working practice reviews, advice to end-hirers on your status to help them make the right decision, an option to switch from Limited to Umbrella to suit your contract, plus legal support and so much more. And what’s even better is that it’s all included in our monthly service charge of £115+VAT! Get in touch today to find out more about what Intouch’s IR35 services can do for you now, come April 2021 and beyond.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.