IR35 is one of the most critical pieces of legislation to grasp if you contract or freelance in the United Kingdom. Since the turn of the century, the legislation has been in effect in the United Kingdom, and it is constantly evolving.
From ‘what is HMRC’s criteria’ to’my friend told me I am in IR35 compliance because of X, Y, and Z,’ there are many questions and myths surrounding the IR35 legislation. And if you get things wrong, the consequences can be serious, both for you and your livelihood. Which is why investing in the services of an IR35 accountant is an excellent investment, even if you are trying to keep your budget in check and your overheads low.
What is IR35 Anyway?
IR35 was implemented by HMRC at the turn of the millennium to stop contractors from operating as disguised permanent employees. An employee who contracts through a limited company but would normally be an employee if the limited company was not used is known as a disguised employee. The contractor reaps the financial and tax benefits of being a contractor while avoiding the responsibilities of owning a limited company.
If HMRC suspects a contractor of being in breach of IR35, they will be required to pay income tax and National Insurance as if they were a regular employee. For a contractor, this has substantial repercussions because their take-home compensation will be significantly decreased.
Since its inception in 2000, IR35 has been supported by different pieces of employment legislation and case law that have evolved over time. HMRC will carry out a ‘test of employment’ to see if a single limited business may be converted into an employee.
Your contract with the said client will be investigated by an HMRC inspector. HMRC would typically dismiss any formal contract or agreement you have with the customer, instead focusing on the’real’ relationship between your limited company and the client. A ‘notional contract’ is the result of this.
The outcomes of this ‘notional contract’ will be used by HMRC to assess whether your agreement with your client falls within or outside IR35.
Are You Operating 'Inside' or 'Outside'? IR35?
As highly experienced IR35 accountants, we understand exactly what HMRC is looking for if they decide to investigate a contractor. However, far too often those being investigated are almost clueless about what they may – or may not – have been doing wrong, simply because they don’t understand what it means to be ‘inside or outside IR35’.
The type of relationship you have with your client is one of the primary elements HMRC would consider when determining your employment status. They’ll look at the present contractor-client relationship as well as any previous interactions between the two. This means that if you previously worked for your client as an employee, you will need to demonstrate a significant change in the nature of your role and how it is performed to avoid being labeled as a “false self-employed” individual.
HMRC will look unfavorably on an arrangement that looks to be structured to evade PAYE tax on the contractor’s part and National Insurance contributions on the client’s side. This is known as disguised employment, and in the context of an existing shady arrangement, it will almost always be seen as an attempt by both sides to avoid paying taxes.
Your exclusivity could be your undoing
Although a client’s desire to ensure that you don’t work for anybody else may appear to be a compliment to your work, any contractual exclusivity will be interpreted as a sign that you are subject to IR35.
How Pearl Lemon Accountants Can Help
The majority of limited company contractors profit from functioning in a way that indicates they are not subject to IR35 regulations. One of the best ways to do this is to ensure you have a formal business structure visibly in place, something a formal, outside IR35 accountant, and hiring an accounting firm in general, can be a big help in establishing.
The first thing we do for many new clients concerned about IR35 is conduct a review of their contracts and agreements, focusing especially on the way they are being compensated. Preventing what it sees as tax avoidance is the primary reason HMRC can be very stringent about IR35, and ensuring tax compliance is one of our specialities.
Once our review is complete, we help our clients ensure that they stay on the right side of the legislation, as it makes the most sense for them. This often means helping them set up an LLC – limited liability corporation – and structuring their business finances in a way that complies with IR35 and other important HMRC rules.
Staying on the right side of IR35 is just one of the many reasons that self-employed people and business partnerships should consider hiring Pearl Lemon Accountants though. It’s not until they consider making the leap from being an informal freelancer to running a real business that most people realise just how complicated their finances can get.
While there are lots of softwares out there to help you send invoices and keep basic financial records, once your business begins to grow you’ll quickly find they become inadequate, and you’ll need to spend more and more time researching complicated tax rules by yourself. Time you don’t have, even if you don’t mind doing so. Most people, though, find tax regulations to be both confusing and, frankly, boring.
At Pearl Lemon Accountants, we actually enjoy what we do. We find tax regulations to be rather fascinating (yes, it does take a special kind of person to be an accountant) and when you combine our expertise and commitment to staying up to date with our desire to ensure our clients keep as much of their hard-earned money as possible you get a committed financial partner who is as invested in the success of your business as you are, and that’s priceless.
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