IR35 – what is it?
IR35 is a general term referring to legislation that may apply to certain contractors under certain circumstances.
IR35 rules determine when a contractor should be treated as “self-employed” or “employed” for tax purposes. If deemed “outside” of IR35, a contractor is viewed as self-employed and can be subject to business tax levels. If “inside” IR35, a contractor will pay employee tax rates (such as PAYE and National Insurance), which can be considerably higher.
As a director of a limited company, you are responsible for ensuring that you comply with the legislation if it applies to you.
It’s important, when setting up your contract, to ensure that you not only limit your tax liability but also ensure the terms of your contract are IR35-compliant.
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IR35 general contract guidelines
Below are some recommended guidelines for drawing up a contract:
- The contract is to be made out to the limited company - not to an individual
- The contract is to be signed by the director or authorised representative of the company
- There must be an end date and/or information explaining the termination clauses
- The contract must contain a substitution clause - this allows the company to send any approved representative it to do the work; it does not have to be the director or person who signs the contract
- The limited company is solely responsible for paying all of the correct taxes
- There are clauses relating to liability and the responsibility for the company to provide the necessary insurances
- There are clauses relating to the possibility of the company having to provide its own equipment