One of the great benefits of being a self-employed contractor is that you can reduce your tax liabilities in ways that permanent employees can’t.
Whilst you might be contracting to take home your hard earned money, it’s also important to know how the UK tax authorities deal with self-employed people, particularly a rather complicated set of rules known as IR35. It’s therefore important to be aware of IR35 and know your IR35 status.
‘IR35’ refers to legislation that HM Revenue and Customs (HMRC) uses to determine whether a contractor is really self-employed, or is actually unfairly claiming self-employment status to avoid tax.
The HMRC considers that a self-employed person should be able to choose when, how and where they work. Someone who has fixed hours, needs permission for annual leave, and can’t be replaced by a substitute, is much more like an employee – what the HMRC calls a ‘disguised employee’.
If the tax authorities investigate and decide that a contractor is really a disguised employee, the HMRC will demand all the ‘unpaid’ back tax and even levy a penalty of up to 100 per cent of your tax bill.
Many contractors and accountants share the view that IR35 needs to be reformed, and although various governments have talked about simplifying IR35 legislation, none has yet delivered it.
In the meantime, ContractingWISE is here to help you navigate the IR35 rules.
Passing the IR35 test
There are various factors that the tax authorities will look at to see if you pass the HMRC IR35 test. For example:
- Substitution – could you send a substitute to do work in your absence?
- Control – do you choose how, when and where the work is done?
- Mutuality of Obligation – is your client obliged to give you future work?
- Financial Risk – do you have any financial risks, like periods without income, contracts ending early or financial losses?
- Equipment – do you provide your own equipment?
- Part and Parcel – are you on organisation charts, have office space, business cards or anything else that makes it look like you are your client’s employee?
Many of these factors can be dealt with when you draw up your contract with your client. By specifying things like your control over how you work, your right to send an equally qualified substitute, and the absence of any mutual obligation at the end of the contract, you can have a compliant IR35 contract.
Remember that the HMRC is trying to establish is whether or not you are effectively an employee, so if your day-to-day working practices don’t make you look like an employee, you are less likely to fall foul of the IR35 rules. At ContractingWISE, we can get you all the advice you need to come out on the right side of IR35.