Ir35 And Its Implications For Contractors

Tax is a key area of interest to all businesses

. For IT contractors, the most controversial piece of legislation to affect the industry is undoubtedly IR35.

The rules were introduced to clamp down on what was seen as tax avoidance by workers using limited companies to perform exactly the same work function as normal employees. So, just what is IR35 and what are the implications for contractors?

IR35 the rules and regulations

IR35 is a piece of legislation that was introduced to make sure that contractors didnt pay less NI and tax than employees who were doing a similar job. It has a lot to do with your employment status that is whether youre regarded as being "employed" or "self-employed" and even for contractors this can sometimes be an incredibly grey area.

The employment rules state that to be termed as self-employed (and thereby be compliant with IR35 and outside normal employee tax rules), amongst other factors, you will typically be working to your own schedule and often using your own equipment, and any financial risks undertaken are to be your own. Ideally, you'll be responsible for finding a substitute should you not be able to complete the work yourself, and if you offer a fixed price youll be responsible for the shortfall should the work take longer than expected. Of course, these 'working conditions' must also be mirrored in the actual contract wording.

If youre seen to be employed, on the other hand, youll likely to be subject to set working hours, will be supervised and wont have to provide your own equipment or risk any of your own money. You are far more likely to be caught by the IR35 legislation and will be subject to the normal tax rules of the employed.

The implication of IR35 for contractors

The general implications are that if you comply with IR35, you wont be subject to the same tax rules as someone whos classified as being employed and as such will take home a higher salary every month. This is always going to be the desired outcome for contractors, so always make sure that your contract complies with the IR35 rules before you begin.

But, its important to remember that IR35 compliance applies to each individual job and not the contractor themselves, meaning that its perfectly possible to have one contract where youre classified as being self-employed (and therefore IR35 compliant) while another contract in the same year could see you being employed and therefore subject to different tax implications.

How to ensure youre IR35 compliant

The only way to really ensure that youre IR35 compliant is to have an expert read over your contract before you begin, and for your working practices to mirror the contract wording. Make sure to thoroughly read up on the area so you know what to expect, and never underestimate the importance of being compliant if you want to avoid some hefty tax penalties.

by: Gareth Hoyle

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