The beauty of business is that it is in constant flux with the needs and demands of the world. This is exactly what makes it exciting, and probably why a lot of us entered the industry in the first place. We love a challenge, and the freedom and flexibility it gives us to manage on our own terms.
If you want to be successful you need to keep your finger on the pulse, with changing laws, clients and business environments. IR35 is one of these legislations that can catch people out. It can get contractors who use intermediary businesses paying up to a staggering 25% of their income in tax.
HMRC set up IR35 to detect “disguised employees” and tax them accordingly. Although this has been in action since 2000 the law is now catching a lot more contractors out. It is in your best interest to make sure you’re in the all-clear. There are simple ways to keep on the good side of IR35 to avoid a hefty tax bill.
What kind of company?
If you are a contractor who uses a limited company or “personal service” company to offer your services you may be at risk of falling inside IR35. Technically any contractor can be found out for breaching IR35, Limited Company or Umbrella.
HMRC investigations can be exhausting for your business in terms of time, energy and money. The best way to avoid getting caught is to know how to stay clear of it in the first place. To justify a contract that breaches IR35 that has already been signed is time-consuming. You have to be able to back up your reasons for being in the position you are in. Being aware of the tax law, and seeking the right advice and support beforehand is easy to do and keeping a good practice is helpful in the long run.
IR35 is a very complex area and to know it thoroughly may be the difference between you paying £7k and £10k in taxes. It is recommended to seek legal advice to gain the correct knowledge that is specific to you. Find an external payroll service that can help advise you on the best route to take.
Negotiate your contract
Regardless of your payment structure, your contract is the first place HMRC will look to find out if you go against IR35 tax rules. Make sure the terms are suitably changed to make sure you cannot be qualified for IR35.
Know your work
HMRC carry out employment tests to find out if you are a genuine one-person business – that is, if you were not a limited company, could you otherwise be employed by the client? The main 3 tests are control, substitution, and mutuality of obligation (MOO). This means knowing the framework of how you are carrying out your work, including time, financial risk, and even location. When under scrutiny from HMRC something like having the same workspace as your client’s employees instead of a home office can put you at risk as being inside IR35.