IR35 Advice for Contractors

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IR35 Advice for Contractors

IR35 – Definition

IR35 is legislation introduced in April 2000 to combat what HMRC describe as “disguised employment”. An example could be if an employee leaves his PAYE employment one day and rejoins the same company the next day carrying out the same job - this time as a contractor rather than a full time PAYE employee. IR35 is intended to stop contractors utilising Limited Companies purely to reduce tax and NI costs.

So what does this mean in practice?

If your contract has the same level of risk, responsibility, liability, and control as a full time PAYE employee then you would be caught by IR35 legislation. You would have to pay full tax and national insurance.

What if I am caught by IR35?

You can still claim 5% of your turnover as expenses and benefit from the flat rate VAT scheme however the tax benefits of the Limited Company are significantly reduced.

Key points

  • Do you control your own work pattern or are you directed and managed by your client?

  • Financial risk – what level of financial risk is your company taking? Ie. bad debts, asset purchases

  • Substitution – if for example you became ill, does your contract allow for someone else to undertake your tasks?

  • Equipment – employees generally would not purchase and utilise their own equipment

  • Termination of contract – employees have a notice period as protection and comfort; contractors should have an immediate dismissal clause in their contract

  • Employee benefits – contractors have none

Please feel free to call to discuss IR35 and its specific implications for your circumstances.