Are you familiar with IR35? Do you know how HMRC’s rules on your working arrangements could impact you? In this post, iContract co-founder Paul de Francisci outlines what you need to know about IR35.
1. What is IR35?
IR35, also known as the ‘self-employment test’, is the set of HMRC rules for identifying when a contracting worker should not be regarded as an independent contractor but rather as an employee. IR35 applies when you provide a service to a client via an ‘intermediary’; this would cover, for example, a limited liability company which is a popular choice of contracting route for most of us.
2. The effect of failing the threshold test
If under IR35 you are determined to be an employee, you’ll need to pay direct income tax and National Insurance on your earnings, following deductions for expenses, while losing tax efficiency of operating through a limited liability company.
Following such a determination by HMRC you would also have to renounce your contractor status and actually become an employee if you wish to continue in your working role at your client!
3. Ensure you’re in safe territory
You are likely to be caught by IR35 if any of the following apply to you:
i) you have typical employee rights;
ii) you are subject to the control of your client as if you were one of their employees; and/or
iii) you are not taking financial risk of your own/responsibility for your limited company.
As a practical matter, the more established your contracting infrastructure is and the larger the variety of clients and contracts you take on, the more likely you are to be regarded as self-employed through your intermediary.
In addition to ensuring the above do not apply to you and that your written contracts reflect your working practice (see below), do create a company logo and use this on business cards and letterheads, have a dedicated business line and work remotely/from an office other than your client’s where possible.
4. IR35 and your written contract with your client
Your contract should be ‘IR35 friendly’. Your written agreement with your client can represent strong evidence that you are not in an employment relationship, so it should reflect your working conditions as a contractor accurately.
Make sure it includes the following provisions:
* Ensure the client/contractor relationship is clearly described (including a set of defined tasks that comprise your work contract and a finite work period);
* Include a right of substitution clause, such that you can provide another person to carry out the tasks for your client within reason
* Show you are taking some financial risk: Demonstrate you will be taking on your own insurance and if you are providing your client with an indemnity this will bolster the fact that you are taking financial risk;
* State explicitly that you are not an employee: Include general ‘belt and braces’ wording that it is neither your nor the client’s intention to create an employment relationship and that the manner and method of work you conduct is always your own – you are not operating at the direction of the client.
HMRC will typically take an overall view of a contractor’s position to determine whether they will be deemed ‘employed’ under the rules. Make sure that your contract reflects your working practices as a contractor and is not just lip service to a de-facto employer-employee relationship.
5. Further reading
For a more in-depth description of factors that HMRC considers to determine employee vs. self-employed status, please visit HMRC’s website.
6. If you are unsure…
IR35 is complicated. If you are not sure whether your contracting framework falls on the safe side of IR35 seek specialist advice. If your client has its own accounting, tax or HR team, perhaps have a chat with someone knowledgeable in one of those departments for some free advice before engaging an accountant or tax adviser.
Be sure to check out our helpful contractor guidebooks and be sure to pre-register with iContract to take full advantage of new contract opportunities.
Note while this blog sets out current thinking on IR35 the law is constantly changing and you should seek specialist legal advice in negotiating and signing your contract to ensure it is IR35 compliant.