FAQs about IR35 legislation

Monday, 28 May 2012 02:57

HMRC can investigate contractors

HMRC can investigate contractors

HMRC can investigate contractors

Back in 2000, a piece of legislation known as IR35 was introduced with one single aim – to stop contractors avoiding their fair share of tax.

One of the major benefits of contracting is the potential to reduce your tax liabilities if you set up a limited company by withdrawing some of your income in the form of a dividend, which does not attract national insurance.

However, HMRC discovered that some contractors operating through limited companies were in fact 'disguised employees', meaning they were a full-time employee of their 'client' in everything but name but avoided paying the same rate of tax as direct employees.

Complying with IR35 legislation is of crucial importance if you plan to set up your own limited company.

Below, we look at some of the most important questions surrounding IR35.

Does IR35 apply to me?

If you supply contractor services via limited companies and withdraw income in the form of a dividend, IR35 is something you need to concern yourself with. You need to ascertain whether you are 'inside' or 'outside' the legislation.

How do I know if I am 'inside' or 'outside'?

This is a difficult question to answer however, if you are effectively an employee of your client then you are likely to fall within the legislation. If someone exercises a significant amount of control over your working hours and how you go about your tasks, HMRC is likely to view you as an employee.

If, however, you can hire someone to do the work in your place, risk your own money, decide when and where to work and for how long as well as work for a number of different clients, you are likely to be deemed as outside IR35.

However, even if you satisfy the aforementioned criteria, you could still be found to fall foul of the law and the consequences of doing so can be significant.

How does IR35 apply to umbrella companies?

IR35 does not apply to contractors working under umbrella companies, as you are an employee of the company and are paid at employed levels of tax rather than dividends.

Will my IR35 status benefit from working for multiple clients?

Having multiple contracts with different clients could benefit you, as HMRC may view it as evidence that you are a bona fide contractor.

What are the consequences of non-compliance?

If you are found to be non-compliant, HMRC will use a deemed payment approach to determine how much tax you are liable for.
Should your status be changed, you will be required to repay underpaid taxes, fines for non-compliance and a possible fine of up to 100 per cent of the money you owe.

Is it a good idea to have an IR35 review?

You can benefit from having an IR35 review each time you enter into a new contract to ensure the contract is a fair reflection of the work you intend to carry out. Your contract can be worded in such a way as to see you fall outside the legislation, however, if it is not a fair reflection of your relationship with the client, HMRC can and will disregard it.
Accountancy services providers can scrutinise your contracts and working practices and determine whether they fall inside or outside the legislation. It is important to note however that even if such a company gives your contract the green light, HMRC will provide its own judgement on the matter.



Finance articles

  • How to form a limited company

    If you are confident that you will fall outside of the IR35 regulations and would like to minimise your tax burden, then you should be looking to operate as a limited company contractor. But how do you go about setting up a limited company?

  • Umbrella vs limited company – which is right for you?

    If you're looking to become a contractor, then you need to consider the two main options open to you – operating as a limited company or using an umbrella company. However, you must also be aware that this decision may be taken away from you.

  • How does the 24-month rule impact those utilising umbrella companies?

    The 24-month rule is something most people have come across, but many will admit they do not fully understand what it is. However, it is particularly important and must be considered when submitting paperwork to HM Revenue and Customs (HMRC).

  • What allowable expenses are available for the self-employed?

    Working for yourself makes for an incredibly exciting career choice. Not only do you get the chance to set your own hours and choose the projects that excite you the most, but it enables you to operate in a highly tax-efficient manner. Being self-employed also potentially allows you to receive a significantly higher income in comparison to doing the same kind of work as a permanent full-time employee, most notably as you could off-set tax against the expenses that you incur.

  • How the forthcoming Real Time Information system will affect reporting payroll data

    Being a contractor gives professionals the freedom to select their own working hours and choose the projects they work on; however, with that comes the need to look after their own payroll and tax issues. With HM Revenue and Customs (HMRC) set to introduce a new payroll reporting system later this year, now is the time for professionals to make certain they are aware of the changes this will entail.

View More Articles

Related stories

Pension charges to be banned under auto-enrolment

Pensions Minister Steve Webb wants to encourage people to join a company pension scheme

The government has announced an outright ban on pension consultancy charges under auto-enrolment and is consulting on a cap on defined contribution scheme charges.

Auto-enrolment numbers hit one million after one year

Pensions Minister, Steve Webb

The number of employees now enrolled in an auto-enrolment pension has breached one million less than a year after the introduction of the government's flagship scheme.

BBC staff use "off payroll" systems to pay less tax

The BBC is at the centre of a storm over tax affairs of some senior staff

Staff at the BBC and around 2,500 other civil servants have been criticised by MPs for using "off-payroll" tax systems to potentially pay less tax and national insurance.

Top tips for buying an overseas property

Buying an overseas property can be risky

A dream property overseas is a tempting option but to ensure your dreams don't become a nightmare you need to pay careful attention to the legalities of buying home overseas.

The top five reasons you should consider spread betting

There are a number of reasons why you should consider spread betting

Whether you are an experienced investor or looking to get into the stock market for the first time, there are a number of reasons as to why you might wish to consider learning to spread bet as an alternative to traditional stock purchases.

What are enhanced annuities?

What are enhanced annuities?

Enhanced annuities could boost your pension income by as much as 40 per cent

LV= announces new Relevant Life Cover for employees

LV= has launched a standalone life cover product

LV= has launched a standalone Relevant Life Cover product, allowing bosses to set up life cover for their employees or company directors efficiently.

Why financial planning is important for footballers

Why financial planning is important for footballers

Why it is important for footballers to keep track of their finances and make sure they are signed up to the right type of financial products to suit income and lifestyle choices.

Newsletter sign up


In addition to the weekly newsletter, which areas of finance would you like to hear from us about:

Tick this box if you would like us to send you promotions from carefully selected third parties.

By signing-up you agree to the terms of use and privacy policy.

sign-up button

Get the latest information on: