It’s a very rare contractor that hasn’t heard of IR35. But there are many, many contractors who are working in this grey area who have little or no knowledge of what it is and how it affects them.
IR35 is the term used to describe the tax legislation introduced in 1999 by HMRC in an attempt to tax people in “disguised employment” at a rate similar those in a staff position. If your contract is deemed to be inside IR35, then virtually all tax planning mentioned in the previous section are off the table, although as you are still able to benefit from the VAT flat rate scheme and are allowed up to 5% of your gross income for expenses so even “inside” IR35 is more tax efficient than an umbrella or permanent position.
Clearly then, it is in every contractor’s interest to arrange their affairs so that they are outside IR35.
The key sensitive areas under IR35 fall into the following categories:
Direction and Control: The level of control over your method of work that your client can exert is extremely important. The less, the better.
No mutuality of obligation: Having a defined project with no future obligation or need from either side to provide further work or services. Immediate termination of contract is a good indicator
Right of substitution: Having the ability to substitute, sub contract or re-assign the project or your involvement within it. This is the wholly grail: If you have this right, and you have exercised it, then HMRC can have no argument: The ability to substitute is unquestionably only available to genuine contractors. If you can do this, nothing else matters.
Commercial Risk: Exposure to financial risks, error correction without reward, bad debts, and provision of insurances
Being in business in your own right with different rights and obligations to permanent staff, own web site, premises, own training programmes etc.
IR35 is an extremely complex area which is beyond the scope of this guide. If you are at all concerned about your status, we urge you to get in touch with your BroomeAffinity accountant or adviser to discuss this and to arrange a contract review.
HMRC’s Business Entity Tests
In May 2012, HMRC introduced a points-based system to determine whether contractors are at risk of falling within IR35.
The tests pose 12 questions and the answers you give are assigned a value. If, after answering all 12 questions, you
In our opinion, it’s another ill thought out approach and asks questions which are less relevant than ones that aren’t asked and therefore causes further confusion in an already murky area. More weight is given to a company’s expenditure on marketing than on a contractor’s degree of Direction and Control.