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.
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?
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