We at Speedy realise the world of IR35 can be a bit daunting. Conflicting advice along with ever changing regulations can make the area hard to get a handle on. To help you along we’ve made a plain English guide to help get you started.
What is IR35
IR35 was brought in by the government to ensure small companies, especially contactors and freelancers, operate their own limited company in the right and proper manner with same level of risk, responsibility, liability and control that other directors or limited companies accept, when they manage their businesses. You will most definitely be caught by IR35 and found to be inside if you have the same level of risk, responsibility, liability and control as a permanent member of staff.
What does IR35 Mean for you
If your contract and working practices give the impression that you are inside or caught by IR35 legislation you will have to pay full tax and full National Insurance (instead of the usual salary and dividends from the profits of your company) and reduced expenses i.e. you’ll earn less money. This is because HMRC believe that you aren’t taking the financial risks or have the same level of control as a director of your limited company, you aren’t entitled to the same.
If you are caught by IR35 is there any benefit in trading through your own limited company?
If your contract and working practices look like you are inside IR35 you can still claim:
travelling and accommodation expenses
5% of your turnover
Benefit from the flat rate VAT scheme
Receive Interest on the funds held within your own company
However, realistically only way to be sure whether your contract falls inside or outside IR35 is to have it reviewed by a specialist
What kind of working practices and contractual conditions are HMRC looking for to see if you’re inside or outside IR35?
Provision of equipment
Right of dismissal
Are you free to work under your own control i.e. not managed by the client?
Although profit share is common place in the employed world, it is without exception in owner managed companies. Also, employees rarely risk financial loss by being employed, whereas if you buy assets such as PC’s, laptops, servers, printers, office equipment or a client fails to pay you as director of your company you will most definitely experience financial loss.
In your contract do you have a clause about using somebody other than you to perform the task your company has been contracted to do?
Provision of equipment
Will you be using your own equipment? Sometimes this is very difficult and allowances are made where security measure prohibit the use of say using your own laptop
Right of Dismissal
Do you have a fixed notice period? The Revenue will argue that this is like an employee, therefore there should be provision in your contract for immediate termination should the client choose to do so.
Plainly speaking you can forget about receiving any holiday pay, sick pay, pension contributions, training courses, Christmas dinners etc…
HMRC don’t just look at the areas covered, they review EVERYTHING in an effort to establish if you are really an employee or a director running, managing and controlling your own limited company. It doesn’t matter if you are working for the same client for one month or twenty years. It’s what you’re doing and your level of risk, responsibility, liability and control.
Advice on Forming a limited company
Forming a limited company need not be a chore, with Speedy we can help you set one up easily and at very little cost of only £35. Contact us today and help us help you.