If you are contractor or thinking about becoming one, you’ll have probably heard the term IR35 mentioned quite a few times – and it is something you always need to be aware of.
An introduction to IR35
To give you a quick overview, it used to be that permanent employees would resign from their jobs only to return a few days later as a limited company contractor. This meant that they would be able to benefit from the tax saving prospects that come with limited company ownership, despite not experiencing any increased level of risk.
The nature of a contractor’s work is temporary and they don’t have the same rights as permanent employees, like sick and holiday pay, so it is only fair that they get some form of tax relief. The government saw fit to take action on permanent employees disguising themselves as self-employed and that is why in April 2000 they brought into effect a piece of legislation to prevent this.
IR35 is complex by nature and the smallest details in your contract or working practices could see you being caught by the legislation. This is why it is essential that you get a professional to complete an IR35 assessment to let you know whether or not you will be caught by IR35.
Determining if you are inside or outside of IR35
If your contract is caught by IR35, the popular term used is ‘inside IR35’ whereas if it isn’t caught you are considered to be ‘outside.’
A professional will be able to tell you for definite but there are a few general signs that should send alarm bells ringing when you look through your contract.
If you are going to be working as a contractor but you have many of the same responsibilities and benefits as a permanent employee, there is a good chance that you are going to be caught by IR35. Look out for things like being able to hire and fire and receiving company bonuses.
What to do if you are inside IR35?
The obvious question is ‘what do I do if I am inside IR35?’. Don’t worry, it isn’t the end of the world, you can still be a contractor, you’ll just have to do things a bit differently.
Many people immediately switch to an umbrella solution if their contract is inside IR35 but that isn’t always the smartest thing to do. After all, the nature of a contractor’s work is temporary, so who’s to say that your next contract won’t be outside IR35? If you are outside the legislation there is no more tax efficient way of trading than using a limited company.
If you are inside IR35 you’ll pay more tax than if you weren’t but it still could be financially beneficial to use a limited company rather than an umbrella company. Our accountants have a wealth of experience in dealing with contractors who are inside IR35, so don’t hesitate to contact us if you want to find out more about the tax implications.
A few things to bear in mind:
- Your take home pay could still be higher in a limited company as you’ll have the ability to generate extra income through the Flat Rate VAT Scheme.
- You only pay tax on 95% of your income rather than 100% via an umbrella company.
- Umbrella company fees can often eclipse limited company accountancy fees.
- Limited companies allow you to claim for a wider range of expenses, which can be offset against your overall tax liability.
IR35 – Public Vs Private Sector
The difference here is in who is responsible for the IR35 assessment and decision. Since the public sector reform of 2017, public sector bodies are responsible for assessing IR35 status for any contractors they engage. They must also complete a “deemed employment” calculation and deduct PAYE tax and national insurance from any payments made to contractors who are inside IR35.
Contractors working in the private sector are still responsible for assessing their own IR35 status, and their limited company will be liable for any additional tax if they get it wrong.
Our accountants are experts in contractor accountancy, to arrange a contract review or to find out more about our low-cost, all-inclusive, fixed-fee service call 01242 504510 or 0207 096 2659.
Why Integro Accounting?
Integro Accounting is the UK’s only specialist provider of fixed fee, limited company accountancy services for contractors, consultants and freelancers that was established to an award winning standard – our Practice Manager, Maria Hickmott FCCA, won The British Accountancy Awards’ ‘Accountant of the Year’ in 2011.
We were set up with the vision of providing a service that is the ultimate for the dynamic, busy professional of today in a language you understand.
Integro Accounting have designed a bespoke service for the contractor who is always on the go; never forgetting that one size will never fit all.
The relationship you have with your accountant is the most important factor in our service which is why we will always offer unlimited contact with your own personal accountant; whether that contact is via the phone, email or face to face.
We have our 3 offices located in London, the South-West and on the Bedfordshire and Buckinghamshire border. There are also meeting locations in many of the major cities and towns across the Home counties, South-West and South Wales, all conveniently placed so that you never have to travel far to meet your accountant.
If you have any questions about contracting or would like to find out more about how Integro Accounting can help you and business please call Christian on 01525 303984, email firstname.lastname@example.org or request a callback.