Why contractors can't afford to ignore IR35
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As a contractor/freelancer operating as a limited company, you could be at risk of being investigated by the HMRC to see if you fall under IR35.
What is IR35?
IR35 is a complex legislation that’s been in place since 2000. The purpose of this law is to identify whether you really are a self-employed contractor/freelancer or if, in fact, you could be deemed as an employee.
It was introduced because the Inland Revenue (now HMRC) was suspicious that workers were setting up limited companies to avoid paying tax and National Insurance Contributions through PAYE. Despite lots of opposition from various professional bodies, and political debates about whether it should be abolished, IR35 remains law.
You may be tempted to bury your head in the sand, and reassure yourself that your self-employed status protects you from falling under IR35. To do so would be unwise. As a contractor, you are vulnerable to being investigated and need to be aware that many legal cases have gone against the companies being investigated.
Until recently, it was always the responsibility of the contractor to determine whether they fell within IR35 status. However key changes were introduced in April 2017, meaning that it is now up to the public sector end client to determine the contractor’s IR35 status - see our related article here.
The financial implications
If you’re investigated and found to fall inside IR35, you could face an unexpected bill for tax and national insurance, as well as hefty fines from the HMRC.
As if that isn’t bad enough, if HMRC decide you fall under IR35 for one contract, they may decide to look closely at your other contracts (past and present).
It all adds up to a potential financial nightmare, which could have a devastating effect on your company’s profits and vitally, to your take home pay.
The good news is that there are steps you can take to minimise the risk of being investigated.
It’s all about demonstrating that you hold significant levels of risk, control, responsibility and liability, as any other director in your industry.
A proactive way forward is to seek advice from an IR35 specialist who can review your contract and work with you to develop good working practices that demonstrate and prove your self-employed status. By doing so, you can have peace of mind that you’ve done everything you can to ensure you are operating your business correctly; whether you are caught by IR35, or not.
We’ve written a useful guide to help you understand more about IR35: Click IR 35 legislation: what is it and how does it affect me?
As contractor specialists we can review your contract and working practices.
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