IR35 legislation was introduced in April 2000 with the aim to reduce the number of contractors who were avoiding PAYE and national insurance via the use of an intermediary company. Basically, if you are a contractor operating through a limited company but working very much like an employee of your client, then HMRC deems that you should be paying taxes as if you were an employee.
To establish whether you fall inside or outside IR35 legislation, your status has to be determined.
Inside or Outside – determining the status
There are a number of questions that need to be asked to determine what the true contracting status will be. These questions, as a freelancer or contractor operating through your company, are based around the risks you take and whether you are experiencing the same levels of risk, responsibility, liability and control as other directors of limited companies in a similar role. The 4 areas of questions to ask are –
- Control – the assessment is needed over how much control you have over the provision of the services in your contract.
- Mutuality of Obligation – the working obligations have to be assessed and whether either party has the right to dismiss each other at short notice.
- Personal Service – the assessment over whether you have the right to substitute an equivalent person of the same skills and ability.
- Working Practices – although a paper contract can be signed and fall outside of IR35 regulations, if the working practices do not reflect the clauses in the contract, then HMRC can assess whether the working practices overrules the contract from an IR35 perspective.
Operating inside of IR35
If you are operating within the IR35 legislation, then you are likely to need to pay a deemed salary. This means that the income that you earn from a contract that falls within IR35 regulations will be liable to PAYE and national insurance. The expenses you would normally claim for would also be greatly restricted as you would not qualify for them.
What to do now
If you have any uncertainties over your contracting status, or you want reassurance that you are operating outside IR35, please contact us. We will be able to review your contract and give you advice to help your status remain outside of IR35 legislation.