What is IR35 and Why is It Important?

When making the move into the world of contracting, one of the most essential considerations is how you will operate, that is, an umbrella company such as PayStream My Max Ltd or setting a limited liability company and engaging the services of an accountancy service provider, such as PayStream Accounting Services Ltd.

The former option means there is less of an administrative burden and you will be able to focus much more of your attention on simply completing your contracts and your life outside of work, while the other provides you with the opportunity to legally minimise your income tax and National Insurance deductions if you are genuinely self-employed.

Employment contract

Enter IR35

A piece of legislation known as IR35 is something that a contractor needs to consider when deciding whether to proceed as limited company contractor or not! Falling outside IR35 very much hinges on whether you are considered as genuinely self-employed rather than a ‘disguised’ employee.

According to Wikipedia:

IR35 is the United Kingdom tax legislation designed to tax “disguised employment” at a rate similar to employment. In this context, “disguised employees” means workers who receive payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client.

Whilst HMRC does not define self-employed, it is widely acknowledged that if you are in control of when, where and how you work, you will be considered to be self-employed and are free to operate as a limited company contractor.

On the other hand, if a client stipulates these working conditions, it is likely you will be deemed to be an employee and you should explore alternative arrangements, such as operating under an umbrella company.

When weighing up whether the legislation applies to you or not, it is a good idea to engage in the services of an accountancy services provider, as they will be able to help assess your situation and provide you with the best possible advice.

Stumbling stone: Holidays!

With IR35 in mind, you need to focus on holidays. Why? When we approach holidays, a number of additional factors become apparent, such as the working hours over the festive period, which can be a stumbling stone for contractors and their “disguised employees.”

If at this time of year you happen to be working on an ongoing contract, it is possible that you could be invited to the employer’s holiday party and many contractors are wary of accepting such an invitation because of concerns it will make them appear to be employed.

Please take note: If you work to a similar schedule over the holidays as full-time salaried employees, you are unlikely to be caught by IR35 as long as you can demonstrate control of the situation along with other factors such as the right of substitution. The factors that determine whether someone is genuinely independent have been highlighted through a number of test cases and guidance issued by HMRC.

If the reality around your assignment including some of the factors highlighted above, demonstrate that you are operating as an independent contractor and that your relationship with your client is truly ‘business to business’, then you will be free to attend such a gathering without fear of becoming in breach of IR35.

Networking is one of the essential elements of contracting and it is always a good idea to maintain strong relationships with clients and a festive celebration provides the perfect opportunity to do so – what you have to to to stay clear of legal troubles is to play by the rule and keep yourself below the radar.