If you are working as a contractor it is likely you will have come across mentions of IR35 – but what exactly is it?
Also known as the intermediaries legislation, the law was introduced in 2000 in an effort to wipe out the problem of tax and national insurance (NI) avoidance.
The people who were particularly affected by the rules were contractors who supply their services through private limited companies or partnerships and pay themselves dividends.
Operating as a limited company can be an attractive option as not only do many agencies prefer to conduct business with contractors if they work in this way, but it can also be more tax-efficient and see people take home more of their gross pay.
This is because some of their income can be made up of dividends, which are not subject to NI contributions.
However, it is vital that you take every caution to ensure you get advice on IR35 compliance so you can be certain that you are not breaking the law.
Unfortunately, it can be difficult to determine whether you fall inside or outside the IR35 rules, which is why it is wise to seek the help of an expert to help make it clear.
Should the law be found to apply to you, you should be paying the same level of tax as a person who is a company employee. If you are outside this definition, you can choose to pay yourself a salary that includes dividends, thereby meaning you will not be spending as much on duty.
It may help to ask yourself whether you are employed, or self-employed.
To be seen genuinely in business on your own account – in the eyes of HM Revenue and Customs – you may have to hire additional workers at your own expense, provide main items of equipment necessary for the job yourself and you should be regularly engaged by different parties.
In addition, the contracts you take on are likely to be for a fixed rate regardless of the timeframe, any unsatisfactory results must be corrected in your own time and at your expense and your personal money is at risk in the event of the company failing.
An employed person is indicated in case law as an individual who can have someone else tell them what, when and where the work they are doing is, have all equipment provided to them and has to provide a personal service.
It may help to have your contracts reviewed by an expert, who will be able to advise you on whether it assists you or not in falling outside the scope of IR35.
However, even if your contracting falls within the definition, you may still find there are ways to maximise your take-home pay, such as by using an umbrella company that allows you to claim allowable business expenses which are offset against your income, thus maximising your take home wages.
There are also no IR35 compliance worries as you are taxed at source as an employee.
Remember, if you are found to have bent or even misinterpreted the rules and claimed to be outside IR35 when you aren't, you may be ordered to pay back all of the tax you should have contributed, in addition to a penalty.
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