A Guide to What is IR35?
IR35 was first introduced in April 2000. The purpose of the legislation was to stop contractors who were working as ‘disguised employees’. For the purposes of the legislation, ‘disguised employees’ were considered to be those who were paid by an intermediary (i.e. a limited company), but did not have as many risks of of company ownership as other limited company directors.
For example; A contractor would leave their job on Friday morning and then come back to work on a Monday working the same job and sitting at the same desk, the only difference would be that they would be working through their own limited company.
If this is the case then understandably you wouldn't be able to benefit from all the tax benefits of a limited company, for example dividends and full expenses. Which is really fair enough as limited company contractors aren't entitled to standard employee benefits such as holiday and sick pay.
Inside or Outside IR35?
If you work on a range of projects for different clients, then it is unlikely that IR35 would apply in your working practices. However, if you work for a client in a role which resembles that of a permanent employee, in as much as you have the same level of responsibility and work under the same conditions as someone who is employed directly, then you could be affected by IR35.
Some of the factors that will be assessed are; the levels of responsibility, risk, control and liability that you will have in your role as a contractor. If they are determined to be the same as those of an employee, then you will be liable for PAYE tax and National Insurance rather than being able to draw a salary and dividends from your company. Don’t worry a good accountant will be able to help you with this.
Limited companies and IR35
If you are deemed to come under IR35, then there are still some advantages to operating through a limited company. You can still claim for travel and accommodation expenses incurred during the course of doing business, as well as 5% of your turnover, which HMRC allows as business administration expenses for outgoings such as accountancy fees, training, computer costs and other costs of doing business. You can also take advantage of the savings available from the Flat Rate VAT Scheme which could save you around £2,000 a year, and earn interest on any funds held within the company. This means that you can still enjoy some benefits if you wish to trade through a limited company, although it’s always worth taking advice from a professional accountant in order to ensure that you are working as tax efficiently as possible.
Is my contract inside or outside IR35?
The simplest way of checking your IR35 status is with Nixon Williams handy IR35 Checker. Though we always recommend you speak to your accountant to get a verbal or written IR35 review.
If you are considering making the move from a permanent position to working for yourself as a contractor, then there are plenty of things you will need to consider. Our handy guide to making the change from permanent to contracting can give you plenty to think about and help you focus your research. If you are already decided and would like to learn more about the savings opportunities available to you, then we have plenty of information about the Flat Rate VAT Scheme as well as a guide to the kinds of allowable expenses as a contractor which can help you to keep your costs down.
If you want to talk through your options with someone who will understand your position and be able to offer you the benefit of their expertise, then we are always happy to help. Please call our new business team on 01253 362062 or email firstname.lastname@example.org for more information.