We’ve talked a lot about IR35 recently, as it is one of the most important issues facing contractors at the moment.
If you are an IT contractor and you haven’t started addressing IR35 issues yet, then it is time to pull your head out of the sand. If you wait until after you have signed your next contract, then you will be too late. You may also find yourself facing thousands of pounds’ worth of extra tax deductions too.
If you wait until after signing your contract, then you may:
- Significantly increase your chances of being caught by an HMRC investigation
- Find you have no bargaining power left to get important changes made to your contract to operate legitimately “outside IR35”
- Find you have wasted thousands of pounds in future tax payments
Why might you be easy pickings for HMRC?
You may not know this, but contractors cannot automatically declare themselves as “outside IR35” just because they have signed a contract with an agency or a client. HMRC have the powers to look at a written contract between a contractor and an agency/client and deem it as a contrived arrangement or “sham contract” – which means they may then declare the contractor a “disguised employee” which means you will have to pay more tax.
When HMRC investigate you, they will look at all of your working arrangements, and form a notional contract based on this, which they will then use to determine your IR35 status. The concept of a notional contract has always been part of the IR35 legislation, but being able to dismiss contracts as a “sham” only came into play after the Autoclenz case in 2011.
This led HMRC to realise that many contractors who had a signed agreement in place, could actually be classed as employees once these agreements were checked.
Working conditions are key
Your IR35 status depends on your
- Working arrangements
– as defined by IR35 case law. So, if you have not already taken steps to understand IR35 and ensure both your contractual terms AND working conditions place you outside of IR35, then you may find yourself being classed as a “disguised employee” which could cost you thousands of pounds in extra tax.
How much extra tax will you have to pay under IR35?
HMRC will expect you to pay additional taxes equivalent to the taxes that would have been paid by you and your employer if you had been employed by them. The tax liability will lie solely with you and your limited company.
HMRC will calculate a figure based on:
- Income tax
- National Insurance
Keep in mind they are able to go back as far as 6 years to recover additional liabilities – and up to 20 years if they suspect fraud.
If you are caught out by IR35 and receive a tax bill based on this, you may also only be given a timescale of three to six months to pay it back – which could seriously affect your cash flow.
As IR35 could end up costing you thousands of pounds, it is essential that you consider it at the following times:
One: Before you start your own business
The best time to consider IR35 is before you even set up your business. You may want to consider:
- How other contractors who are working outside IR35 have set up their businesses
- What terms and conditions you will need to work to
- Will these terms and conditions bring you inside or outside of IR35?
If you want to be outside the scope of IR35 then your working conditions must be that of a self-employed contractor and not an employee.
Two: Before you sign a new contract
If you are in the process of signing a new contract, it would be in your best interest to have it independently reviewed by an IR35 specialist along with your potential working arrangements – before you sign it.
If you sign it without getting it reviewed, then you won’t get any opportunity to negotiate your contract for IR35 compliance at a later date.
Three: Get all existing and historical contracts checked
In order to protect you from future HMRC action, you should have any current contracts, as well as historical ones, reviewed as a matter of urgency.
By getting a professional contract review, you will be able to make sure your working arrangements do not fall foul of IR35 rules and also collect useful information that you can then share with HMRC if they do decide to investigate you at a later date.
If you would like to discuss IR35, contractors and advice on ensuring your working relationships fall outside of IR35 then please email our managing director, Jonathon Webley, at firstname.lastname@example.org