If
you’re a contractor, you’ll no doubt be familiar with revenue and customs intermediaries’
legislation, better known as IR35.
This
is a piece of legislation brought in back in April 2000 with “the aim to
eliminate the avoidance of tax and National Insurance Contributions through the
use of intermediaries such as Personal Services Companies”. Essentially,
preventing what had become a common tax dodge among freelancers.
When
the HMRC clamped down, many were left with large tax bills and significant
fines to pay.
Clearly
then, to legitimately maximise your earnings you’ll need to determine whether
you’re inside or outside IR35 legislation.
If
you’re in ‘deemed employment’ you’re inside IR35 and therefore subject to
higher tax.
If
you’re self-employed, you’re outside IR35.
Contractors
engaged through an umbrella company are effectively viewed as employees and so
therefore avoid IR35 altogether.
For
the avoidance of doubt, if you are operating independently from the contracting
company, you need to show it. As a business operating on its own terms, there
are some simple practical things that you can do, here are 3 basic tips:
1. Set up your
company, as a company
Have
your own company office & equipment (this may simply be a home office
space), use company headed paper, business cards and even a company website to
promote your business and experience (websites can be set up for extremely low
cost – or even free). In addition, you should also advertise and market your
company name, not your own, ensuring that the company is VAT registered.
2. Pay
attention to the contract
Avoid
an overly long or continuous contract period; the specifics of deliverables
including timescales are much more appropriate than generics rolled up over a
combined or continuous period on a company contract - ensure a new contract is
in place to reflect different projects and/or scope of work.
Make
sure company contracts have clauses for immediate dismissal for unsuitable
workers, rights of substitution and a no mutuality of obligation clause.
Remove
all contractual benefits – like holiday pay and paid sick leave.
3. Work with
Clients, not for them
Work
at times that suit you, not just the client.
Where
possible, you should also try to avoid
working alongside your clients’ staff employees and think carefully about
management channels. HMRC could view too many similarities to an employee as
‘integration into the workforce’.
While
these tips by no means cover all aspects of the legislation – they should give
you some help on the road to working as a legitimate personal services company.
Working
as a contractor should give you great flexibility and opportunity to maximise
your earning potential, provided you comply with legislation.
If
you’re currently working through Primat as a contractor and would like to
discuss IR35, please contact your consultant. Otherwise, for more information
about IR35 visit hmrc.gov.uk/ir35/
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