IR-35 Explained – Contractors Beware

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HMRC
(Her Majesty’s Revenue and Customs) has a clear definition of self-employment. Any contractors who do not fall into HMRC’s interpretation of self-employment are affected by IR-35.

IR-35 is a set of rules that will cause an increase in tax as well as N.I (National Insurance) liability. It will also stop contractor companies from being allowed to hold onto their profits with the intention of using those profits to grow their business in the future.

All contractors who fit the bill that IR-35 clearly defines will be taxed as per Schedule E and National Insurance after facing deductions from expenses. After these deductions, their income will be classified as a ‘deemed payment.’ A mixture of IR-35 and non-IR-35 turnover in contractor companies will result in any income and rewards associated with these unregulated contracts to not follow the rules. Regular Section 198 expenses are permitted to be claimed. There is also a provision for different intermediary expenses of 5% of a contractor’s turnover.

In addition to the 5% allowance mentioned above, the following expenses can be claimed.

  • Pension payments – These can be from either personal or executive schemes
  • Business travel – This type of expense occurs while performing business responsibilities.
  • Subsistence – This refers to accommodation as well as meals eaten while away from a permanent residence.
  • Professional indemnity cover
  • Benefits in kind – An example of this includes private medical insurance

All training expenses will not be part of this allowance. Legal advice should be sought after to see your particular position under the IR-35 rules. An excellent place to start would be with good quality accountants in London.

Self-employed versus Employed

The most important thing that needs to be established is whether you fall into the ‘employed’ or ‘self-employed’ category as per HMRC’s definition. The Revenue elaborates by saying that they will take an overall view of the position of the contractor before deciding whether the contractor falls into ‘employed’ under the rules. All amended contracts must be a reflection of your working practices.

All contractors will find it to be favourable if they are viewed as ‘self-employed’ so that their income or a part of their income will be IR-35 free. A way to strengthen your position is to spread your business interests or change your working practices so that you hit more of the boxes of IR-35’s definition of self-employment.

Here are a couple of tips to work around the IR-35 rules

  • Make sure that you present yourself as ‘self-employed’ as per the Revenue definition of the term. To present yourself as ‘self-employed’, you will need to adopt working practices and procedures which match any stated in the contract.
  • An attractive option is to work overseas so that you will get taxed more fairly in different places. One thing that you should be aware of is that overseas laws are equally and sometimes more taxing that taxation laws in the UK. Ideally, you should contact a couple of contractor accountants or any accountants in London before leaving, or you might be in the same position when you leave.
  • Some contractors are doing nothing about the IR-35 issue because they believe the legislation will be revoked or feel like it will not apply to them. This isn’t a wise approach as the IR-35 is law and anyone who falls under the IR-35 should make all the necessary arrangements so that they can bear the increased financial burden.

As already mentioned, if you’d like to know more about where you stand or about what you can do in regard to the IR-35, your best bet would be to contact contractor accountants or any accountants in London for legal advice.

Clear House Accountants are specialist contractor accountants who work with contractors from a variety of industries such as IT, Construction, Engineering, Project Management etc. We create smart solutions for contractors and guide them on the best possible strategy for them to avoid IR-35, extract tax efficiently and save money. Contact us for more information.

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