Why it’s more important than ever to review your IR35 status
New IR35 tax rules to be implemented this April aim to crack down on non-compliance within public sector contract work. The changes add to IR35’s already harsh set of parameters and make it more important than ever to review your IR35 status and working arrangements.
During the 2016 Autumn Statement, the Chancellor announced that new IR35 rules would be introduced in April 2017 for freelancers, consultants and contractors who provide services through limited companies. Aimed at those who operate more like permanent employees than contract workers, HMRC believe that these individuals should be paying the same tax as employees.
To avoid paying more tax under the new rules, we recommend reviewing your contracts and, where relevant, taking steps to prove that you are working on a self-employed basis.
What is IR35?
Introduced in 1999, IR35 is aimed at tackling tax avoidance from limited company contractors who are deemed to be in ‘disguised employment’ ie. they are registered as freelancers, contractors or consultants but operate more like permanent employees.
Prior to IR35, limited company contractors were able to take dividends in-line with the normal distribution rules and could avoid paying NICs. Today, if you operate inside IR35 legislation, there is limited scope for taking dividends. Instead, most remuneration must be paid as salary, attracting NICs and higher rates of Income Tax. Given the potential tax hit, IR35 means that contractors should make every effort to operate outside the legislation where possible.
IR35 changes from April 2017
Currently (prior to April 2017), ‘you’ (as a contractor, consultant or freelancer) are fully responsible for administering your own IR35 status. This is set to change:
For public sector contracts
From April 2017, the responsibility of administering IR35 shifts to your clients. This means that the agency, public sector client or third party that pays you decides whether or not your contract falls inside or outside IR35. They will also be liable to deduct any associated Income Tax and NICs from your earnings.
For private sector contracts
The new ruling does not apply to services you provide to the private sector. For these contracts, you are still responsible for determining and administering IR35 yourself under HMRC’s existing IR35 rules.
Should I get my contracts reviewed professionally?
For services that fall outside IR35 legislation, it’s important to make it crystal clear that you’re working on a self-employed basis: both your working practices and that your contracts need to demonstrate this.
The best way to create IR35-friendly contracts is to use an IR35 professional. Here at Maitland, we’ve teamed up with IR35 specialist Qdos Contractor, who provide contract and working practice reviews. For a fee, they can assess your IR35 status and take the necessary steps to put robust contracts in place. We highly recommend their services, and you can find out more about Qdos here.
How else can I prove that I operate outside IR35?
To make it clear that you operate outside IR35, you need to ‘paint the picture’ that your limited company operates in the same way as other ‘normal’ businesses do. In addition to formal contract reviews there are several steps you should take.
Ten steps to show that you operate outside IR35
- Set up a home office
- Provide your own tools and equipment eg. laptop, desk, mobile phone
- Have a company website that promotes your services
- Hand out business cards
- Use a business email address
- Set up a dedicated landline in your company’s name
- Attend networking events
- Keep a diary of new leads and business prospects
- Do business with more than one customer
- Avoid close supervision, direction and control from your client – working from home at least two days a week is a good way to prove this
HMRC don’t make it easy for you or your clients to check your IR35 status – there’s no definitive checklist to refer to for limited companies. To tackle this, HMRC are planning to provide a new digital tool to help public sector bodies check the IR35 status of their contractors. This is likely to be made available towards the end of 2017.
The new ruling applies to public sector contracts only but that’s not to say that it won’t extend to the private sector in the future. Whatever sector you work in, we strongly recommend reviewing your IR35 status and, where necessary, seeking professional advice to ensure that you are fulfilling your legal tax obligations and operating as efficiently as possible.
For expert advice on IR35, speak to our team on 01825 748308