In its essence, the IR35 rule governs contractors who did not meet the HRMC’s definition of ‘self-employment.’ This rule is designed to stop workers from fraudulently claiming to be contractors for tax benefits. If you are working as a contractor, you need to be sure that you comply with all the guidelines of IR35. IR35 contracting shall be subjected to increased tax and national insurance liability. The contractor companies will then be prevented to retain profits for future business growth. The rules governing IR35 can be a bit complicated. This guide will help you understand the IR35 rule.
Are you covered by the IR35 rule?
Contractors who are subject to IR35 rules will be liable to Schedule E taxation and National Insurance after deductions for expenses. The income of contractors under IR35 will be in the form of deemed payment. Contractor companies can have a mixture of IR35 and non-IR35 turnover. The regular Section 198 expenses can still be claimed. Aside from that, the IR35 rule provides a 5% intermediary expenses of a contractor’s turnover.
It is worth noting that training expenses will not be covered as allowance. It is recommended that contractors seek legal advice to determine their position under IR35 rules. If you are caught by IR35, it is best to change your working practices and make your contracts IR35 compliant in order to bypass the legislation.
Are you self-employed?
The first and most important you should establish is whether you are employed or self-employed under the terms of HMRC. Your position as a contractor will be determined whether you are self-employed or employed. Thus, your working practices should also indicate working practices. If you are able to diversify your business interests or change working practices in order to satisfy the criteria for self-employment, your position will be strengthened.
Ways to beat IR35 rules
- Prove that you are ‘self-employed’ based on the Revenue definition of the term. This is the ideal option. This means that you will have to change your contract and make it IR35 friendly. Make sure that the working practices match the ones stated in the contract.
- Contract overseas. This way, you will be taxed on a fairer basis wherever you are. But more than the taxation schemes, there may be other reasons you would consider contracting overseas such as less pollution or cheaper accommodations. However, make sure that you consult a tax specialist before leaving as foreign tax laws is equally complicated.
- Go Permanent. Contracting is a way of life so you should enjoy it. Consider one of the previous options before going permanent. However, if you feel that the uncertainty over IR35 is unbearable and wants to have a more secured future, then going permanent is an appealing option.
- Do Nothing. Other contractors have not address the IR35 ruling hoping that it will be revoked or that it does not apply to them. However, this is the wrong move. IR35 is a law and if you get caught, then be ready to suffer the increased financial burden.