Familiarising yourself with numerous legislation is just one of the many tasks involved in setting up your own business. But for contractors, specifically, IR35 legislation is crucial to get to grips with.
What is IR35?
IR35 is a type of tax legislation put in place to prevent contractors from limiting their tax liabilities by supplying services through a Limited Company, despite carrying out the same work as the company’s employees. In short, it’s designed to stop false self-employment.
Does it affect all contractors?
The HMRC IR35 rules define ‘disguised employees’ as contractors who are treated and act like any other member of staff working for a company. IR35 legislation aims to stop disguised employees trading under an intermediary, which would entitle them to greater tax benefits.
It may seem simple on paper, but in actual fact, many contractors have found it difficult to determine whether or not the IR35 legislation applies to them. Trading as a Limited Company and working ‘outside’ of IR35 can result in higher take-home pay than an Umbrella agreement, but you need to be certain about your position or you could face financial penalties.
Another thing to bear in mind is that the IR35 legislation applies to each individual contract. This means that you might be outside of IR35 for one contract, but within its scope for another. And that’s why it’s important to have a specialist IR35 accountant conduct thorough contract review processes, in order to clarify if any part of your work falls inside the IR35 regulations.
What penalties could I face?
Contractors found to have been ‘careless’ can be fined 30% of unpaid tax. This climbs to 70% of unpaid tax if the contractor was aware they were inside of the IR35 legislation but deliberately did not make the payment, and 100% of unpaid tax if they also tried to conceal their actions.
Whose responsibility is to determine IR35 status?
Big changes to IR35 regulations were introduced from April 2017, which saw the responsibility of determining IR35 status move from the contractor to the client. But this is only where the contract is with a public sector body. The government is currently also debating rolling IR35 for contractors in the Private Sector, although this is likely to take some time, if it happens at all.
Some evidence suggests that this has had a negative impact on the industry, causing firms to insist their contractors trade under an Umbrella agreement to relieve the burden of payroll and other administrative duties.
Pairing up with a specialist contractor accountant
If you’re considering setting up as a contractor, the contractor accounting experts at Intouch Accounting can help you to navigate the minefield that is IR35 legislation. Our accountants offer specialist IR35 guidance to make sure you understand your rights and risks under IR35 and other laws. We will do a free IR35 review of all your contracts to ensure compliance. To find out more about our service, get in touch today.
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.