In the last few years, HMRC have increased the enforcement of IR35 provisions to ensure that only those with a status of “self-employed” (as per their definition) receive the tax breaks they are entitled to. This article will take a look at some basic steps you can take towards ensuring your contracts remain IR35 friendly.
What is IR35?
IR35 refers to legislation designed to combat tax avoidance in the UK. It is specifically focussed on partnerships and limited liability companies that may not be paying the tax and National Insurance contributions that they should.
How to avoid IR35
Being a self-employed contractor offers a degree of freedom that full-time employees do not have. If you’re a contractor and you want to ensure you avoid IR35 and remain eligible for tax breaks, take note of the following points relating to the contract between a limited company and its client:
- The contract must be made out to the limited company and not to an individual employee.
- The contract should be signed by the director or an authorised representative of the company.
- There must be an end date and/or information explaining the termination clauses.
- The contract must clearly state that the limited company is solely responsible for paying all of the correct taxes.
- The contract needs to include clauses relating to liability and the responsibility for the company to provide the necessary insurances.
- Clauses relating to the possibility that the company may have to provide its own equipment should also be included in the contract.
- If the contract contains a substitution clause, which allows an approved representative to carry out work on its behalf, the HMRC is known to pay close attention to such provisions.
IR35 was primarily set up to identify people who have been working for the same company for more than 6-12 months and who have been in the same role for medium to long term periods. In light of this, and from our experience, we have identified three key areas that HMRC’s investigations tend to focus on:
- The terms of your contract as well as the length of time for which you have been contracting with the same company.
- The period for which you have filled your current role (i.e. do you move divisions or are you in the same division).
- Whether you must supply your own equipment for the job.
We recommend that if our clients are unsure of their IR35 status, they have their contract(s) reviewed by a specialist to ensure their work falls outside the scope of IR35.