With the controversial tax change IR35 being delayed to April 2021, freelancers and businesses hiring contractors now have time to take steps to adhere to the IR35 ruling.
What is IR35?
IR35 (off-payroll working) is being implemented to prevent limited company contractors from avoiding tax when they are really private sector employees. For example, if a sole trader operates as a limited company, but is treated as a normal employee, they are deemed to be ‘inside IR35’ and will be required to make additional tax and national insurance contributions. This is also known as a ‘disguised employee‘.
Taking different measures to avoid an IR35 investigation is essential for all contractors. So here are 10 tips that you can follow so that IR35 won’t apply to you.
Umbrella companies and IR35
You will be taxed as an employee if you work for an umbrella company. On your earnings, you will pay income tax and National Insurance Contributions.
If your contract work falls under IR35 and you work through your own limited company, all of your earnings will be taxed as ’employment’ earnings.
How to “avoid IR35”
1. Don’t attract HMRC’s attention
Avoid late tax returns: Submitting your tax return late, or making errors on the return, will draw attention to yourself from HMRC and could make them suspicious of you making other mistakes.
Hire an accountant: Hiring an accountant to sort your tax paperwork can significantly reduce your chances of being investigated by HMRC.
2. Avoid replacing an employee
You should start a contract role with the understanding that the role has been created for a contractor.
If the contract is to fill a role that was previously filled by an employee, the client is likely to expect the worker to perform like an employee. This increases your risk of being caught by IR35.
3. Get a contract review
Although there is no such thing as an IR35-proof contract, it is still essential to get a contract review.
After receiving your contract, we highly recommend having it reviewed by a professional. They will be able to identify any sections that could put you inside IR35 from the off.
4. Make sure you are not named in the contract
In your contract, you should always operate as a business-to-business service provider, through your limited company.
Being named in the contract could compromise your business relationship, and an HMRC inspector may have suspicions that your business relationship, is actually an employment ‘contract of service’.
5. Agree a ‘confirmation of arrangements’ with the client
The ideal scenario is that your contract will clearly show that you’re outside of IR35, but that is not always the case. Ask for a ‘confirmation of arrangements’ form from the client, that confirms that your relationship is a business-to-business one.
6. Keep a contractor diary
If you do find yourself on the taxman’s radar, the HMRC may conduct reviews of your previous contracts.
Keep records of your phone logs and copies of your emails, so that you have proof of your day-to-day working arrangements if the taxman does come knocking.
7. Be in control of yourself
There are a few different tests HMRC uses to determine your real employment status and whether you’re inside IR35. If your client has total control over the way you work, you’re likely to be caught by IR35.
Before signing your contract, it is essential that you agree with your client that you are in total control of how your work is done.
8. Agree a ‘right of substitution’
When negotiating your contract, ask your client if it is possible to include a ‘right of substitution’ clause.
If you can send a substitute to provide the same service as you, it proves that you are not delivering a personnel service, and you cannot possibly be an employee.
9. Avoid ‘mutuality of obligation’
Mutuality of obligation (MOO) is another test to determine your IR35 status. This means that an employer is required to provide work and the worker is required to accept it.
You must ensure that your contract lets you refuse work and allow freedoms. e.g take on other projects simultaneously.
If you ever reject work from your client, you must make sure that you keep evidence of it.
10. Don’t get too close with the client
Don’t become part of the company. Avoid receiving any benefits that their normal employees receive. Unfortunately, this does mean missing out on the Christmas party…
If you’re an IT contractor looking for a new contract role outside of IR35, check out our latest contract roles online now.