In this article, we look at why IR35 was implemented, and what steps contractors should make to ensure they comply with the IR35 rules – including using professional contract review services, and taking out IR35 insurance.
IR35 and ‘disguised employment’
The Intermediaries Legislation (IR35) targets individuals who work for clients via their own limited companies, but whose working practices are more akin to those of a normal ’employee’ than someone truly ‘self employed’.
The reasoning behind the legislation is that some workers (particularly in IT) would leave a permanent job one day, only to return shortly afterwards as a limited company contractor, performing the same job as they did beforehand.
Working via a limited company, the contractor can pay himself a modest salary and draw the rest of his income in the form of dividends. The tax savings compared to a permanent employee on a similar income are significant.
For IR35 not to apply to your contract work, both the wording of the contract itself, and your working practices, need to indicate that you are in business on your own account and not merely a ‘disguised employee’, as per the HMRC definition of the term.
Specialist accountants and IR35
As we advise elsewhere on Company Bug, one of the key factors you should consider when choosing an accountant is their knowledge of legislation and issues of particular relevance to the contracting industry.
Accounting for limited company directors who are caught by IR35 is straightforward, but what you need is a specialist accountant to proactively offer help and advice on how to determine your IR35 status prior to starting a new contract.
Contract review services
In the first instance, before signing a new contract, you (or your accountant) should send it to an employment status specialist who will be able to advise you on your IR35 status, and how to comply with the IR35 rules.
An IR35 contract review service will tell you whether or not the contract falls within the IR35 net, and if so, you will be provide recommendations on how the contract should be amended to make it “compliant”.
IR35 / tax investigation insurance
In addition, you should also consider taking out a tax investigation policy. This type of insurance will cover the costs of professional representation should HMRC decide to investigate your IR35 status, and the more comprehensive policies may also cover any unpaid tax liabilities you may be deemed to owe following an investigation.
Several specialist contractor insurers offer IR35 insurance.