What is IR35?

If you’re contracting, you’ve probably heard a lot about IR35. You may have taken contracts deemed inside or outside IR35, and seen your allowable expenses and income fluctuate as a result.

It’s also possible you’ve heard stories of contractors who have fallen foul of HMRC, and had their IR35 status retrospectively investigated by the tax office. But do you fully understand it?

IR35, or the “Intermediaries Legislation”, was introduced in April 2000. It was a response to increasing numbers of ‘disguised employees’, particularly within the IT sector, setting up as Limited companies but working exactly as they did when they were employees – fixed days, fixed hours and the same responsibilities. This allowed these workers to gain the tax advantages of operating through a Limited company, particularly relating to National Insurance and VAT, without actually changing their relationship with the client. Since the introduction of IR35, HMRC’s position has been that ‘if it looks like an employee, acts like an employee and works like an employee – it’s probably an employee!

How do I know if I’m inside or outside IR35?

IR35 status is a complex issue, and anybody subject to an IR35 investigation by HMRC will find their business practices scrutinised in detail. The first place HMRC will look is at the contract, but the investigation can extend beyond this. In practice, there are a few key criteria that will let you know if you’re operating inside or outside IR35:

Control. If the client has control over the worker, they’re likely to be deemed inside IR35. For example, if you have to complete your work in a specific fashion or following company procedures, you’re inside IR35. If you have freedom to complete work as you see fit, you’re more likely to remain outside.

Substitution. Can you send somebody else to do the job for you? If the requirement is that you complete the work, rather than that the work be completed, you’re inside IR35.

Mutuality of Obligation. Is the client required to give you work, and are you required to accept the work? If so, you’re acting as an employee and will again find yourself inside IR35.

Passing these three criteria doesn’t mean you’re definitely outside IR35, although it’s a good benchmark. A good contractor accountant will review every contract before you accept it, and advise on your IR35 status. Complex or ‘borderline’ contracts may require specialist legal advice – however, this is rarely likely to be necessary.

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What happens if my contract is inside IR35?

IR35 is designed to prevent ‘disguised employees’ gaining a tax advantage over regular employees. As such, it probably won’t be a surprise to hear that tax liability will increase and tax advantages will be stripped away when a contract is caught by IR35.

If you’ve been working inside IR35, you make a ‘deemed salary’ payment to HMRC at the end of the tax year. 95% of your company’s turnover, minus some allowable expenses, will be treated as your deemed salary*. Income tax (PAYE) and National Insurance contributions are calculated on this amount – if you’ve paid a lower amount in tax/NI over the year, you’ll need to make up the difference. Your accountant will be able to provide further advice on this, and make the ‘deemed salary’ calculations for you.

* Travel, mileage, accommodation and subsistence expenses that would be allowable for a regular employee are subtracted from your deemed salary, as are pension contributions, professional subscriptions and childcare costs.

If you have any questions about your own IR35 status, or for advice on whether a contract may fall inside or outside IR35, please call us on 01442 795 100 or drop us a line at sophie.lewis@dolanaccountancy.com.

Whats next…

Why Dolan Accountancy?

Dolan Accountancy was set up by Simon J Dolan, the man behind the well-known brand SJD Accountancy. With over 25 years experience in the contracting marketing, Dolan Accountancy has the heritage, reputation and credibility you can trust. Working closely with our sister company, ContractorUmbrella, it means we can offer one low cost, fixed fee package at £95 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of ContractorUmbrella – With changes in Public Sector IR35 Legislation we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, ContractorUmbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use CashPlus free of charge for the first year, saving you £69.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.

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