IR35 can be quite confusing for contractors, mainly due to the fact that employment status can be such a complicated issue; so not knowing whether you fall inside or outside the legislation is a common issue.
The IR35 legislation has been put in place by the government to prevent ‘disguised employment’, which is when people try to reduce their tax liability and National Insurance, by leaving full time employment and then returning to the same job immediately as a contractor working through their own limited company.
IR35 – Are you Inside or Outside?
It is HM Revenue and Customs that determines which way your practices fall, and in order to fall outside IR35, you will need to show that you are working with the same level of risk, responsibility, control and liability as other contractors.
To fall outside IR35, you must show that you:
- Risk you own money through your business
- Are required to handle any loses, as well as profits
- Can bring in additional workers
- Have complete control and final say over how you work
- Use your own equipment for work – although some companies will insist you use their office equipment
- Are not entitled to employee benefits, such as holiday pay, sick pay, pension contributions or training courses.
What if I fall ‘inside’?
If your contract is caught by the legislation, HMRC will view you as having the same benefits as a permanent employer, which means that your IR35 take home pay will be less compared to someone who is ‘outside’ – you won’t be able to claim back on certain expenses and will have to pay full tax and National Insurance contributions.
However, there are still some benefits as a limited company contractor inside IR35:
- You are still entitled to claim for some expenses, such as travelling, accommodation and 5% of your turnover
- You can benefit from the Flat Rate VAT Scheme, which will save you money throughout the year and earn interest on the funds held in your own company account.
- Contractors can make use of wider range of employer schemes such as: use of home expenses, cycle to work schemes, claim childcare vouchers and annual party allowance.
- Just because this contract is inside it doesn’t necessarily mean other contracts that run concurrently and after, won’t be outside and you will have everything in place.
If like many contractors, you are still unclear of where you stand with your IR35 status, then seeking professional advice from an accountant is the best option.
A good accountant can help with any queries concerning the legislation, whether it’s working out your status, going up against HMRC to dispute your current status, or any other financial concerns; having a contractor accountant can be an extremely useful resource.