If you're thinking of going down the contractor, consultant or freelancer route it’s important that you are aware how IR35 rules and legislation could affect you.
What Is IR35?
In short, IR35 rules affect all contractors who do not meet HMRC's definition of 'self employment'.
The Government introduced the IR35 legislation in 2000, in response to a growing number of individuals leaving their permanent jobs, only to return to the same business to do the same work but as contractors operating through a Personal Service Company (PSC).
By setting up as a PSC these individuals were able to benefit from significant tax benefits. IR35 rules determine how tax on income from assignments should be calculated. The overall aim of IR35 is to stop all those employees (often referred to as 'disguised employees) receiving these tax breaks that those working under limited companies receive.
Are You INSIDE or OUTSIDE of IR35?
As a contractor, consultant or freelancer, you’re responsible for making sure that for each assignment you undertake, tax and NI are applied and paid correctly for all income generated through your business.
IR35 rules apply to anyone operating through an intermediary such as a Limited company or partnership and whilst it does not determine what type of work can be carried out through a Limited company; it does determine how much tax is due.
Does IR35 Apply If You Work Through An Umbrella?
If you choose to be employed through an Umbrella company, such as eQuidity, you will become an employee of that company, meaning that IR35 rules do not apply and you’ll pay the same level of tax and NI as any other employee.
Can You Be Penalised If HMRC Investigate & You Are Inside?
An enquiry about your business and IR35 will typically begin with a letter from HMRC asking if you have considered IR35 and why you believe to be outside of the legislation. You will need to provide accurate evidence so you are not caught by IR35. If HMRC do not accept your evidence they may investigate and review your siutation. Once they have spoken to all parties they will be able to make a final decision about whether the rules apply to you. If you are outside IR35 then the investigation will end. If they deem you to be inside IR35 then they may demand retrospective PAYE tax and National Insurance, plus interest and a possible penalty. Avoiding this situation is important.
What are the Main Tests in Applying IR35?There are three main tests in determining whether IR35 Rules apply to you:
• Personal Service – is the engagement for a specific person? Can you send a substitute instead of that person?
• Control – is there a “Master & Servant” relationship in respect of how, when and where the work is carried out?
• Mutuality of obligation – is there an expectation for the client to provide further paid work and for the contractor to continue to produce more work?
IR35 Contract Reviews
At eQuidity we have partnered with Abbey Tax who offer a contract review service. The contract review service is designed to consider the IR35 status of the engagement(s) that your company has where you are working with an end client; whether that is direct to the end client or via an agency.
The contract review report considers both the contractual terms and working practices. In order to understand the working practices, we ask you to complete an IR35 Contract Review Questionnaire. The report will offer suggested changes to the contract (if appropriate) and an opinion as to the 'IR35 status' of the engagement.
Prices for this service start from just £249 + VAT.
In order to proceed with a review, you will need to submit your completed questionnaire and contract details to firstname.lastname@example.org and pay for the review in advance. This starts the clock for the standard 5-working-day turnaround, but we can expedite the reviews, albeit this increases the charge by £50 + VAT for each day sooner.
For more information about this IR35 service or further help about whether the rules affect your working situation please contact eQuidity: 03333 585 222 enquiries@eQuidity.co.uk. Alternatively you can check out our Useful Download for more information about IR35.