If you’re self-employed – and particularly if you work through a limited company or Personal Services Company – you won’t need us to tell you that IR35 came into force at the start of this month.
The new arrangements are meant to crack down on contractors and employers exploiting a loophole in the tax rules which make it more efficient to hire a contractor through a limited company.
HMRC thought this was being abused, and contractors who were essentially ‘employees’ were dodging significant tax liabilities.
From the start of this month, all that has changed.
Under IR35 it is the responsibility of the company hiring you to be certain of your tax status – and if you fall within the arrangements they will take tax and National Insurance deductions from you as if you were an employee.
For now, this only applies to medium and large companies. Small companies, with an annual turnover of no more than £10.2 million, a balance sheet of no more than £5.1 million and no more than 50 employees, are not covered and if you are providing services to these you will remain in charge of your own tax affairs.
You will also remain in charge of paying your own tax if your contract with the hiring company is deemed to fall outside IR35. You can check this using HMRC’s own tool here.
IR35 applies to personal service companies, limited companies with a sole or majority director or shareholder that is in charge of the company’s services. But it does not apply to sole traders, who remain outside the system and responsible for managing their own tax affairs.
Confusingly, because it applies on a contract basis, you may well be able to work on one contract for a company outside IR35 but be inside the arrangements on another contract with the same firm.
HMRC has said it will take a light touch in the first year of the new arrangements – but it can investigate your arrangements at any time going back up to six years if necessary.
So it’s vital you manage your affairs correctly. Things which would tend to bring you within IR35 include:
- Only you carry out the work your company is contracted to do
- You work for your own limited company, but receive employment benefits such as paid leave or sick pay
- Your payment is calculated on the basis of time
- Your work is supervised by someone in your client’s business
- You work for a single client over an extended time
Signs that you are likely to fall outside IR35 include:
- You can delegate your work to somebody else
- You are paid by project or on a fixed price
- You decide how and when you work
- You provide your own equipment
- You work with more than one client at a time
- You have your own premises and insurance
Of course, this is not an exhaustive list by any means and you must make your own checks to ensure your arrangements are in order.
Getting to grips with all this can seem daunting – but we are here to help. If you have any concerns just click on the button and we’ll take it from there.