Ultimately every director needs to have an understanding of IR35 and make their own judgement on whether or not they are caught by the legislation. LCCS is not able to provide advice on this issue as it is a complex matter of employment law and we are not employment lawyers, we are tax accountants. If you are unsure of whether or not you are caught by IR35 legislation then this guide may be of assistance, but you may also want to seek professional advice. Whether or not you are caught by IR35 often comes down to the wording of the contract between your client and your limited company. Most recruitment companies use IR35 friendly contracts. However if you are still unsure there are many organisations who offer IR35 contract review services.
What if I am caught by IR35
We work under the assumption that you are not caught by IR35. If you are caught by IR35 then the advantages of working through a limited company are greatly reduced. There are still some deductions that you can claim that you wouldn’t have otherwise been able to, but the advantage of paying yourself through dividends rather than wages is lost.
If you have been working through a limited company and HMRC subsequently deems that you are caught by IR35 your dividend payments will be deemed to have been wages and you will have to pay the additional PAYE and NI that would have been owing on them.
What is IR35
IR35 is legislation that came into force in April 2000 to stop genuine employees from working through an intermediary such as a partnership or limited company and thereby avail themselves of the tax advantages that being in business has over being an employee.
HMRC believed that there were a number of employees who were working through limited companies simply as a means of avoiding national insurance tax. Unfortunately contracting is somewhere on the borderline between being a genuine employee and being in business for yourself. As a result it pays to be aware of IR35 and to take steps to ensure that you are not caught by the legislation.
What is looked at and how can I minimise my risk?
To avoid IR35 you have to be able to show that you are genuinely in business for yourself. HMRC looks at a number of factors to determine if you are really in business. Factors such as:
The ability to make a loss: HMRC looks at whether you can make a loss on a contract. However we would argue that few businesses and no well run businesses make a loss on their contracts. It is when you are out of work, or do not have enough contracts that you make a loss. Just by virtue of having a limited company you have annual fees to pay, so if you don’t get a contract for the year you will make a loss, therefore you have the ability to make a loss.
Advertising: HRMC argue that genuine businesses advertise for business. We recommend that you have a linked in account and post your CV on websites of employers to find. Also having your own website is a good idea too. This all counts as advertising and shows that you are actively looking for business.
Provision of own equipment: HMRC argues that genuine businesses use their own tools. Therefore it is a good idea to have a laptop. You can therefore argue that you are equipped to provide your own tools even though in reality for security reasons no client will ever want you to use it.
Ability to substitute someone else: If you can send somebody else in your place to do the work then that is a good indication that you are genuinely in business for yourself. Have a look at the contract that your recruiter has provided for you. Although you will never actually send someone else to work for you most contracts have a provision stating that this is possible. This is an excellent way to determine if it is an IR35 friendly contract or not.
Ability to terminate immediately: Another clause that IR35 friendly contracts have is the ability for either party to terminate the contract at any time.
VAT registration: Not only can you save money through the flat rate VAT scheme but VAT registration is also looked at as a good indication that you are in business for yourself. This is why we register all of our clients for VAT.
Control: This is quite a tricky one. HMRC will argue that if the client controls how you work then the points to you being an employee. However under any contractual arrangement the contractor must deliver what the client wants, so the client must always have some control. However ultimately you must have some level of autonomy. The client can’t tell you exactly how and what you should be doing for every second of your contract. Otherwise they may as well just do the work themselves.
The hours you work: If you work a set number of hours, like you would working the register at Tesco then you are likely to be an employee. If you are employed to do a job, like most professionals, and work the hours that are required to get the job done then you are more likely to be in business.
Company stationary: HMRC argue that you are more likely to be in business if you have company stationary. My suggestion would be to design yourself a company logo and letterhead and maybe stick it at the top of a word document. You then have your own company stationary. Use it for all of your business related correspondence.
Training: Any kind of training that might help with your business is considered a good indicator. And is generally a good idea anyway. Keep a record of any training you do, even if it is self taught.
An office: Not only is a home office a good tax deduction but it is also a good indicator that you are in business for yourself. The more organised and business like it is the better. A proper filing system, perhaps