The IR35 is the most discussed piece of tax legislation that affects contractors. The idea behind the legislation is to stop what the HMRC believe amounted to tax avoidance by contractors who are operating through a limited company.
It’s intention was to make sure that those individuals working through a limited company were not paying any less National Insurance or income tax contributions than employees doing the same or similar job.
Essentially it comes down to a contractor’s employment status but this isn’t as easy as it seems because it can be difficult for contractors to determine whether they are classed as employed or self-employed. For example, if you are working for a limited company you are employed – but what if you are the sole director of that limited company?
IR35 Compliance
To be put into the self-employed category and in turn comply with the IR35 rules, you are required to meet certain criteria. For example, self-employed contractors are required to work to their own schedule and in many cases using their own tools/equipment. Your employment status may be reflected in the contract that you sign with the company or organisation you are working with. However, if you are employed the opposite would be the case, often having fixed hours and will be working under a superior.
Figuring out whether or not you are IR35 compliant isn’t easy to do and in fact the only way to really ensure that you are is to consult an accountant with experience in this area or another qualified professional. This advice may involve an unwanted expense but it is worth it rather than risking the potential consequences.
IR35 Rules
If you are not classed as employed and instead fall under the IR35 rules, you will often be able to take a higher amount with you each month. Due to the difference in tax rules between the employed and those who fall within the IR35 boundaries, they will end up paying less in tax which in turn increases their income.
Obviously this is the target that you are aiming for but each job can differ in terms of compliance with the IR35 so as mentioned earlier, the best way to ensure that you are in the situation you want is to have an experienced professional look over the contract to ensure that you are not unwittingly falling under the “employed” bracket of the legislation.
The key thing to remember is that the IR35 rules do not apply to each contractor but each individual job.