Online accounting providers’ Freeagent provide all the essential IR35 info.
If you work as a contractor, one of the most important pieces of tax legislation you have to be aware of is something called IR35.
But do you know exactly what this is or how it affects your work?
Here Emily Coltman FCA, Chief Accountant to FreeAgent - who provide an award-winning online accounting system for contractors and small businesses - explains what IR35 means to contractors and the main things they need to know about it.
What is IR35?
It’s a piece of tax law that HMRC uses for contractors. Essentially it’s a tax on anyone who trades through their own limited company, but who would be considered an employee in all but name when they take on work for a client.
Who’s affected by IR35?
If you supply services to one or more clients through your own limited company or partnership, but you are treated by your client or clients as if you were one of their employees, then you have to deal with IR35.
Remember that IR35 also applies on a client-by-client basis and a project-by-project basis. So it’s possible you could need to pay tax under IR35 for some clients but not others, and even for some individual projects you carry out for that client rather than the full list of projects you do for them.
How do I know if I’d be considered an employee?
If you think IR35 might apply to you, you need to work through HMRC’s business entity tests in order to assess whether it actually applies to you.
For each test you need to give yourself a score and you need to keep evidence for your answer. For example, one of the tests is making your business more efficient - so HMRC might look at changes to your business plan and process review documents, and investigate whether you have actually implemented these planned improvements.
HMRC sets the scores for each test and the lower you score, the more likely it is that IR35 will apply to you. HMRC also considers other crucial factors, such as who has control over your work; so if your client tells you not only what to do, where and when to do it, but also how you must do it, it’s likely that IR35 applies.
In addition, HMRC won’t just look at one factor when deciding on IR35 - they’ll look at the whole picture. For example, many highly skilled employees have the final say in how they carry out their work, such as a social media manager being able to choose their own multi-posting tool such as Sprout Social or HootSuite - with little input from the marketing director - but this doesn’t mean the social media manager is not an employee.
HMRC will also take into account the fact that some employers allow flexible working for some or all of their employees, meaning that they don’t have to stick to rigid working hours. Just because there are no “set” hours in these cases, this doesn’t mean that HMRC will decide these workers are not employees of the company.
If your client has employees on their payroll, HMRC might also look at factors such as whether you have been given the same kind of company email address as their employees have and if you have business cards printed showing you as part of the client’s team - or even if you share employee privileges such as use of the staff canteen. If you do, it’s likely IR35 will apply.
How do I mitigate the risk?
The best way to do this is review the business entity tests and try to make sure your risk is as low as possible. So if you don’t want to rent an office, take on staff, or have bad debts, just to prove to HMRC that your business is independent, you may be able to adapt your processes to make your business more efficient - or to make sure that you’re not working for a previous employer on the same terms as you had when you were an employee.
It’s a good idea to make sure you have a watertight contract for any services drawn up, which doesn’t leave any room for dispute by the employer, worker or any third party such as HMRC. If possible, you should have this checked by an accountant or lawyer who specialises in IR35 work.
However, remember that HMRC doesn’t just look at the contract terms - it looks at whether the contract reflects the actual situation. In particular, if you have a “substitution clause” in your contract (a clause which allows you to send someone else to do the work if you are unable to attend) then HMRC will look to make sure that this is genuine.
What if IR35 applies to me?
The reason why HMRC wants workers to be employees, rather than independent contractors, is that no employer’s National Insurance is payable on contractors’ fees.
If you need to pay tax under IR35, your limited company or partnership has to make what’s called a “deemed payment”, to compensate for the National Insurance that would have been paid. Here’s how HMRC explains how to calculate it.
Remember that IR35 can be a very complicated and confusing piece of legislation so if you’re in any doubt as to whether some of your projects, or work for some of your clients, might be caught by it, you should ask your accountant for advice.
Emily Coltman FCA is Chief Accountant to FreeAgent, who provide an award-winning online accounting system designed to meet the needs of contractors and small businesses. Try it for free at www.freeagent.com.