If you provide freelance or contractor work, you may be wondering whether or not IR35 applies to you and if so, how you will be affected by it. Understanding the regulations regarding IR35 will help you to better prepare for it and ensure that you are not surprised if you receive a tax bill. Here are a few guidelines and tips that are designed to give you a better understanding of the topic.
- Owning more than 5 percent of a limited company in addition to having one client that contributes more than 60 percent of your turnover means that IR35 does apply to you. Note that you will also have to have a contract between that single client and your limited company and also work in a location that belongs to the client and use equipment that the client owns. This means that you are considered a disguised employee by that client.
- Legislation can be confusing and downright frustrating to understand. The HMRC has designed tests to determine if you are considered to be in disguised employment. You should ask yourself if you have the option of substituting yourself for another company employee or if the client actually controls when and how you work as well as the type of work that you do.
- If you are considered in disguised employment according to IR35 legislation then you will pay more tax. Your taxes will be paid as if you actually worked for the client in question. The income that is paid into your limited company from that specific client would also be subject for NI and tax. This makes the tax that you are required to pay much higher than the regular tax rates for limited companies with client or supplier relationships.
- You can prove that you are not actually in disguised employment. If you have your own business stationary and company logo and use your own equipment, this could show that you are not actually working for the client as an employee. Additionally, a company website for your limited company that is designed to bring in additional clients and ensuring that your contract is written properly can help as well. You can also prove that you are not in fact an employee if you work from a home office just as much as you work from the client’s office. You will want to secure a business telephone number even if you are using Skype or another virtual number.
- Understand that proving you are not in disguised employment can take money. After all, setting up a website, phone number and office space is not going to come cheap but you will be far better off in doing so as opposed to paying the higher tax imposed on you if you are deemed a disguised employee. Also understand that everything you pay in order to support your limited company is tax deductible so you will be giving back to other businesses instead of paying your money directly to HMRC. Small businesses acquire operating costs so if you can show that your company is paying for things just like other businesses, it can help you to prove your case regarding IR35 legislation.
About the Author: This article was written by Nixon Williams, offering IT contractor accountant services.