Contractor Tax

To any contractor, self-employed professional (or anyone who shows an unhealthy interest

in HMRC) the IR35 legislation is something that you must be well aware of by now. For anyone else in the world of contracting who hasn't the foggiest idea what the letters and numbers mean however, it may help you to read on.

Contractors are basically self-employed individuals working through their own limited companies for businesses that require their expertise. This means that they are not employed, therefore are not bound by the same tax laws as average employees. This is beneficial to contractors, as they are entitled to a lower tax bracket than employed professionals, their wages paid to their limited companies in which they can then claim dividends etc. This obviously makes contracting a very attractive concept, and in turn, many once employees decide to take the contracting route at some point throughout their careers.

Every rose has its thorn however, and the thorn in a contractor's side comes in the form of the tax office's ominous IR35 legislation. In true HMRC style, once contractors began enjoying the advantages of contracting (especially the lesser amount paid to the taxman) the treasury decided to enforce a legislation designed to clamp down on contractors and their tax status. It must be noted here that IR35 is by no means always bad news, if a contractor is fully compliant or has taken out sufficient IR35 insurance, then they can stand tall if an investigation was to occur.

IR35 targets those working as contractors who are actually employees still, regardless of their change in professional position. In layman's terms, this means that contractors could be working as a contractor but still benefiting from the advantages that comes with being an employee (holidays and sick pay for example). Basically, HMRC don't like it when contractors benefit from both ends of the spectrum.

Over the years, since its launch 12 years ago back in the 2000 (although the millennium seems like only yesterday) IR35 has been a bane in many contractors' lives. HMRC have launched thousands of investigations into the professional positions of thousands of contractors. The annoying thing about IR35, among many annoying things is although most may not be trying to beat the system, or even know that they are doing something wrong, HMRC punish those that fall under the legislation regardless.

IR35 can make contractors incur huge financial losses, and being the target of an enquiry can be both time consuming, costly and can bring negative attention to a limited company. Being a subject of an IR35 investigation can obviously be prevented, contract reviews are always a helpful start, and relative contractor insurance is always advised. HMRC can't have the wool pulled over their eyes, therefore any contractor worried, concerned or apprehensive concerning the legislation or its effects, should contact IR35 specialists immediately. When it comes to tax and status, it is always better to be safe than sorry!

by: Chris Carvill

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