If you’re working as a contractor in the UK, you’ll no doubt have heard about IR35 and its severe tax implications. Due to the complexity of the legislation, many contractors rely on HMRC’s online tool to work out whether or not they fall within the scope of IR35, but this could be a costly mistake.
Hang on, what exactly is IR35?
IR35 legislation is designed to ensure that only contractors who are properly self-employed receive the relevant tax breaks. If a contract between an employer and a contractor seems to set up an ongoing relationship, it may fall under IR35 and that contractor will be taxed as if they are an employee.
If you are deemed an employee by IR35, you could lose up to 25% of your earnings, so you need to make sure your contracts do not fall foul of IR35.
A tool that can help determine your IR35 status
No one wants a chunk of their hard-earned cash taxed away unnecessarily. As a contractor you’d best be 100% sure of whether or not you fall under IR35. Unfortunately, HMRC’s guidelines around IR35 are somewhat difficult to understand and trying to work out whether IR35 applies to your contract or not can be an infuriatingly complex procedure.
This is why the online IR35 calculator developed by HMRC has become so popular. This online tool is supposed to determine whether you’re within IR35 or not. Sounds great! But is it reliable?
Who can you trust?
A survey conducted by an IT recruitment firm, Qdos Contractor, also found that 85% of contractors do not trust HMRC’s online calculator. Another survey found that HMRC’s calculator labelled more than 7 of the 21 contracts that gave rise to the most important IR35 court cases incorrectly. That’s not a fantastic success rate by any measure.
You could be potentially waving goodbye to 25% of your earnings due to an incorrectly assessed contract. Worse still, if you’re deemed to have been paying tax incorrectly, you could be liable for interest and penalties on further tax and NI contributions.
You need to be 100% certain about your employment status. The best way to do this is to speak to an experienced UK accountant who specialises in contractor accounting. Without doing this, you will never be certain of your IR35 status.