What exactly is IR35?
The IR35 is an anti-avoidance tax legislation which targets those contractors who do not meet HMRC’s definition of ‘self-employment’ and provide their services through their own limited company known as personal service company (PSC) and avoid paying PAYE and National Insurance contribution. Essentially, this means that the HMRC recognise those contractor as ‘disguised employees’ and the income they earned as ‘deemed payment’.
The term ‘disguised employees’ means that the contractors will be paying employment taxes as a normal employee under employment contract but in the other hand will not get any employment benefits such as bonuses, sick leave, annual leave pay that employee’s often receive. Hence, this legislation can result in substantial legal and financial burden for those contractors.
Furthermore, from April 2017 public sector contractors have lost the right to determine IR35 status due on which many genuine self-employed contractors have been forced to end up being under IR35 category unfairly.
However, under section 198 some of the following expenses can still be claimed by a provision of 5% of a contractor’s income;
- Travel, Business Mileage and Subsistence
- Personal Pension contribution
- Professional Indemnity Insurance
- Assets used for business e.g. computer, tablet, printer
How to beat IR35?
- Get an ‘IR35 proof’ contract with the work procedure that is similar to those stated in the contract which will show that you are genuinely ‘self-employed’. For example, avoid any terms which will refer that you are controlled, directed and supervised by your client.
- While agreeing contract, make sure your name (instead of your company name) is not represented in it as this could suggest that you are offering services personally i.e. you are personally liability just in case if HMRC treat your company under IR35 at any point in the future.
- You should never request to take annual leave or sick leave nor should you expect to get paid for these leaves as it would mean that you are receiving some kind of benefits that other employee receive.
- Make sure that your contract doesn’t restrict you to work for other clients at the same contract period.
- Make sure you are in client’s organisation chart / website which will suggest that you are an employee of your client. Also use your company email address rather than using client’s email address.
- Explore possibility of transferring your job scope from public sector to private sector as there is less risk of this legislation in private sector at the moment.
- If you are surely under IR35 then choose umbrella company rather than working under IR35 contract even through you will paying same tax and national insurance under both structure as you will get access to employment benefits and pension contribution under umbrella .
- Ultimately go permanent instead of working under IR35 as having proper employment job will give you employment benefits as per Employment Act which is unavailable/limited under IR35 contract.
For further detail or advice on IR35 legislation, please feel free to contact a member of our team.
By Roshan Malla