Stepping out into the unknown world of contracting can be daunting, especially when there’s so much to get your head around. From leaving the security that permanent employment provided to getting everything ready, there’s plenty of things a contractor needs to be aware of before starting their first contract. One of the most import things is IR35, but what is it, how does it affect you and why do you need to know about it?
In this blog we explain everything you need to know about IR35 as a new Limited Company contractor.
IR35 in a nutshell
IR35 is a tax legislation introduced by HMRC in a bid to combat tax avoidance by contractors. As a Limited Company contractor you’re able to enjoy benefits, which permanently employed workers are not entitled to. IR35 prevents contractors who claim to be self-employed, but are really working in a permanent position, claim for benefits which they are not entitled to and ultimately pay less tax. This type of contractor is commonly referred to as a ‘disguised employee’.
Why is IR35 important?
Whenever you start a new contract as a Limited Company contractor, your contract will be deemed either ‘inside’ or ‘outside’ IR35.
If found ‘inside’ you’ll have to pay more tax, and be considered working as a disguised employee. Paying more tax will effectively reduce your overall take home pay.
If found ‘outside’ you’ll be able to spilt your income between dividends and salary. This ultimately means you’ll be able to keep your National Insurance and tax contributions at a minimum, meaning you’ll therefore be earning more as a contractor than you would if you were earning the same amount as a permanent employee.
How is your IR35 status determined?
HMRC have guidance on how your contract and working practices are considered either ‘inside’ or ‘outside’ IR35. The following ‘rules’ will determine your IR35 status:
Personal service / substitution – Are you able to send someone in your place to complete part of your contract? Being able to do so would strongly suggest your contract is ‘outside’ IR35.
Control – How much control will your employer / end hirer have for the duration of your contract? If you’re able to demonstrate how much control you have over when, where and how you work, then you’ll be less likely to fall ‘inside’ IR35.
Mutuality of obligation – As permanent staff are expected the work certain days and times, their employers are obligated to pay them, even when they’re not there (ie holiday and sick pay). When a higher level of obligation can be proven from the end hirer, then it’s likely the contract will fall ‘inside’ IR35.
Public and private contracts – how they differ
When you accept a contract it will either fall within the public or private sector. But what are the differences?
Public – It’s the responsibility of the end-hirer to decide your contract’s status, they must then pass their decision onto the fee payer (usually the supplying agency) whether you’re to be paid net or gross. If you believe your contract’s status has been incorrectly defined, you are able to challenge their decision. Read our blog, How to challenge a client’s IR35 determination to find out more.
Private – Up until April 2021 it is your responsibility to determine your IR35 status. If you’re truly ‘inside’ then you’ll be able to enjoy all the benefits of being ‘self-employed’. Get it wrong and you’ll be liable for all the tax risks as previously mentioned.
Your SG accountant is able to help correctly determine your IR35 status, and guide you through the sometimes tricky world of making sure you’re kept on the right side of ‘outside’.
What changes are on the horizon?
If your contract is public then nothing will change. If your contract is private then April 2021 will see some significant changes.
Private contracts will match those within the public sector, meaning that all contract statuses will be determined by the end hirer, without any input from you, the contractor. Should the hirer get your status wrong they will also be liable for any associated tax risk, meaning you’re no longer part of the equation. But rest assured, if your contract is classed as ‘outside’ IR35 come April 2021, it will remain outside, as long as you follow the IR35 guidance.
Looking for further advice and support?
Download our comprehensive IR35 survival guide here for free, for a more detailed review of IR35 and what’s to come.
If you’re looking for a contractor accountant who’s able to support you now and beyond April 2021? Our expert team here at SG all have an in-depth understanding of the IR35 legislation and are able to guide you with each contract you undertake. Get in touch today to find out more about our services, and how our expert team are able to support you and your contracting career.