Is my private limited company IR35 compliant?  

Working as a contractor is an exciting career path, but it also involves understanding a plethora of tax regulations. One of the most complex areas of tax for contractors is the Intermediaries Legislation, otherwise known as IR35.

Significant changes have been made to the Intermediaries Legislations over the last few years. It was announced that from April 2017, the IR35 status of all public sector contractors, was to be determined by the ‘engager’. This means the end client or agency.  

It was announced in the last budget that similar changes will be rolled out to contractors working for private sector organisations. These changes are due to come into effect from April 2020. So, it’s even more imperative that contractors understand this complex area of legislation.  

IR35 explained

The Intermediaries Legislation came into effect in April 2000 and it has become a controversial piece of legislation. It was introduced as a way of combating ‘disguised employment’. This is where an employee leaves their job on a Friday, only to return the following Monday doing the same job but this time under the guise of a contractor.

It was felt that disguised employment was on the rise, particularly in the IT sector and HMRC was keen to combat it as it was costing them millions each year in lost taxes.

How your IR35 status is determined

Determining your IR35 status can be incredibly complex, and you should seek guidance from a contractor accountant who is highly experienced in this area. Like ourselves, for instance!

In brief, when determining the IR35 status of a contract, we would look at your contract, terms of employment and working practices. If these are more aligned to how an employee works rather than a self-employed person, then it would be deemed that the contract places you inside IR35.

The main areas that will be taken into consideration when determining your IR35 status are:

Control: what extent are you under the direct control and supervision of the end client?

Substitution: can you provide a substitute if you’re unable to perform the contract duties?

Mutuality of Obligation: when the fixed contract term has finished, is there reasonable expectation that the contract will be extended?

When responding to these questions, it’s imperative that you answer them honestly, as HMRC can check if they actually reflect the way you work.

What it means to be inside IR35

If the terms of the contract and your working practices deem to place you as working inside IR35, you are allowed to use 5% of the contract value to cover the costs of running your limited company but the remainder of your income is subject to normal Income Tax and National Insurance Contributions.

This means, that what you earn from the contract cut be cut by a substantial amount.  

How to protect yourself

Even though the changes to the Intermediaries Legislation for contractors who work with private sector organisations don’t come into effect until April 2020, it’s never too early to make sure you are IR35 compliant.

Starting from now, you should submit all new contracts for a full IR35 review. An IR35 review involves looking at your contract terms and working practices to make sure they are compliant. We are pleased to tell you that we can offer this service as part of our monthly accounting packages.

If following the review, we think there are areas that could be improved, we’ll suggest ways to tighten these so there is less chance you will be caught inside IR35.

To find out about monthly accounting packages or hear more about our IR35 review service, speak to one of our directors on 01962 867550 or send us a message via our website.