IR-35 Explained – Contractors Beware
HMRC (Her Majesty’s Revenue and Customs) has a clear definition of self-employment. Any contractors who do not fall into HMRC’s interpretation of self-employment are affected by IR-35, so they need to beware of the consequences.
IR-35 is a set of rules that will cause an increase in tax as well as N.I (National Insurance) liability. It will also stop contractor companies from being allowed to hold onto their profits with the intention of using those profits to grow their business in the future.
All contractors who fit the bill that IR-35 clearly defines will be taxed as per Schedule E and National Insurance after facing deductions from expenses. After these deductions, their income will be classified as a ‘deemed payment.’ A mixture of IR-35 and non-IR-35 turnover in contractor companies will result in any income and rewards associated with these unregulated contracts to not follow the rules. Regular Section 198 expenses are permitted to be claimed. There is also a provision for different intermediary expenses of 5% of a contractor’s turnover.
In addition to the 5% allowance mentioned above, the expenses that can be claimed are briefly explained below:
- Pension payments – These can be from either personal or executive schemes
- Business travel – This type of expense occurs while performing business responsibilities.
- Subsistence – This refers to accommodation as well as meals eaten while away from a permanent residence.
- Professional indemnity cover
- Benefits in kind – An example of this includes private medical insurance
All training expenses will not be part of this allowance. Legal advice should be sought after to see your particular position under the IR-35 rules. An excellent place to start would be with good quality accountants in London.
Self-employed versus Employed
The most important thing that needs to be established is whether you fall into the ‘employed’ or ‘self-employed’ category as per HMRC’s definition. The Revenue elaborates by saying that they will take an overall view of the position of the contractor before deciding whether the contractor falls into ‘employed’ under the rules. All amended contracts must be a reflection of your working practices.
All contractors will find it to be favourable if they are viewed as ‘self-employed’ so that their income or a part of their income will be IR-35 free. A way to strengthen your position is to spread your business interests or change your working practices so that you hit more of the boxes of IR-35’s definition of self-employment.
Here are a couple of tips to work around the IR-35 rules
- Make sure that you present yourself as ‘self-employed’ as per the Revenue definition of the term. To present yourself as ‘self-employed’, you will need to adopt working practices and procedures which match any stated in the contract.
- An attractive option is to work overseas so that you will get taxed more fairly in different places. One thing that you should be aware of is that overseas laws are equally and sometimes more taxing that taxation laws in the UK. Ideally, you should contact a couple of contractor accountants or any accountants in London before leaving, or you might be in the same position when you leave.
- Some contractors are doing nothing about the IR-35 issue because they believe the legislation will be revoked or feel like it will not apply to them. This isn’t a wise approach as the IR-35 is law and anyone who falls under the IR-35 should make all the necessary arrangements so that they can bear the increased financial burden.
As already mentioned, if you’d like to know more about where you stand or about what you can do in regard to the IR-35, your best bet would be to contact contractor accountants or any accountants in London for legal advice.
Clear House Accountants are specialist contractor accountants who work with contractors from a variety of industries such as IT, Construction, Engineering, Project Management etc. We create smart solutions for contractors and guide them on the best possible strategy for them to avoid IR-35, extract tax efficiently and save money. Contact us for more information.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.