IR35 was introduced by HM Revenue and Customs (HMRC), established to combat tax avoidance in the provision of personal services. Following this, the definition of self-employment was outlined. This way, disguised employees couldn’t take advantage of the tax benefits of self-employment. However, those who falsely identify as self-employed also enjoy the security of being a permanent employee.
IR35 was met with opposition, as it was going to affect many legitimately self-employed contractors. They found themselves within the legislation, causing them to lose up to a quarter of their income. IR35 is a complicated piece of legislation, we also have a full IR35 guide.
Those caught within the legislation pay significantly more tax and national insurance. If inside, limited opportunities remain for contractors to reduce their tax bills by offsetting expenses. The ability to pay oneself a small salary and make up the rest with dividends is removed, ultimately lowering the profits available for investment.
There are several factors that HMRC consider when deciding if someone is within or outside IR35:
- HMRC will analyse the current contractor-client relationship, as well as pre-existing relationships between them. So, if you previously worked for a client as an employee, you will need to prove there has been a significant change in relationship to fall outside of IR35; otherwise, this acts as a signifier of ‘false self-employment’ status and an attempt to avoid ‘Pay as You Earn’ (PAYE) tax.
- HMRC can’t focus on one factor that suggests false self-employment, they need to see the bigger picture. They also need to analyse your overall employment habits.
- If a client wants to know that you are not working for anyone else, it might seem like a compliment. But, it could signal that you fall inside IR35. A significant factor of being self-employed is flexibility with regards to working hours and who you work with. If you can’t do this, it may appear that you’re faking self-employment.
These are strategies you can adopt to ensure you are outside IR35:
- Don’t rely on one sole client.
- Have the appropriate indemnity and liability cover.
- Have a well-maintained website.
- Have varied working hours.
- Ensure that your contracts are clear.
- Have a substitution clause.
- Pay for your own equipment and travel.
- Try to carry out jobs for your client that their employees do not.
- Make sure your client work badge displays your company name.
- Make sure you charge VAT and is stated in the contract.
If you want your contracting business to stay rightfully outside of IR35, you must behave like a business, not an employee. Save yourself unnecessary taxation by collecting the necessary evidence to ensure you don’t appear to be disguising your employee status.
This is just a summary of the IR35 legislation, so for more information, read our expert IR35 guide.
If you’re in need of advice when it comes to things affecting your business finances, get in touch with One Click Group today and call us on 0345 557 1287.
Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.