What is IR35?
IR35 is a set of tax rules set up by the government that has been in place since 2000. Haven’t heard of them? Small businesses are starting to feel the heat as the governments are currently cracking down harder than ever. Unfortunately, this means a lot of smaller organisations are getting caught by simply not understanding the changing tax laws or the correct steps of practice that keep you outside of IR35.
Who is it for? Why is it in place?
Small businesses and contractors who operate through an intermediary, such as a limited company. The tax rules are in operation to catch out “disguised employees” who seem to be one thing on paper, and another in practice, in that their work is very similar to the client’s employees. These are tested by HMRC with employment tests control, substitution and MOO (Mutuality of Obligation) which will be discussed further on.
What happens if you get caught?
If your specific case gets flagged up by HMRC, be prepared. It may be a stressful, time-consuming experience that could cost your business a lot of money. If your accounts are checked and it is found that you are inside IR35, you could be taxed up to 25% of your income.
Steps to preventing it:
- Become familiar with the legislation
Knowing what you are dealing with is half the battle, with expert advice you can ensure that your contract is IR35 friendly. Companies like People Group Services help you with everything you need to know about managing your practice.
- Keep a copy of the contract
Once you are happy that your contract is IR35 compliant. Keep a record of it for reference, so that you know what is expected from you as a contractor outside of your client’s company.
- Log details of any conversations about time and location of work
IR35 requires you to be functioning as a small business and needs evidence to demonstrate this. Things like having an independent office away from the client’s place of work, receipts and emails show this.
- Log professional advice to ensure it is IR35 compliant
Document any conversation you have in written form about the support you have received in ensuring you are staying outside of IR35
- Store timesheets and invoices
You need to demonstrate that you are working for the client, but maintaining your own limited company. Evidence of when you have worked, and what you have done in that time is crucial to passing control employment tests.
- Store all information in a file that is easy to access
All of this information should be kept somewhere accessible so that you can refer to it at any time. So if HMRC come knocking, you have a good amount of evidence to support your case.
The Main 3 Employment Tests by HMRC
Control – Elements in the contract that show the client having more control of the contractor, e.g. start/finish time, specific days the contractor should work etc.
Substitution – As a contractor, someone should be able to take your place if you are not able to work and there needs to be a clause in the contract to demonstrate this.
Mutuality of Obligation (MOO) – Neither the client or the contractor must feel obligated to give or provide work in any way if the contract is outside IR35