3 tips for basic IR35 compliance

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/