If you are a contractor, one of the first things you need to be familiar of is the IR35. It will be beneficial for you if you have an idea what IR35 is all about. Through this article, you will know the five basic things you need to know about IR35.
1. What is IR35?
IR35 is a piece of tax law that the HMRC uses for contractors. This is the tax for those who trades through their own limited company, but who would be considered an employee in all but name when they take on work for a client.
2. Who is affected by the IR35?
IR35 applies on a client-by-client basis and a project-by-project basis. So it is possible that you will need to pay tax under this for some of your clients but not all of them. Also, even for some individual projects you carry out for that client, you need to pay the tax rather than the full list of projects that you are responsible for. Just remember that if you supply services to one or more clients through your own limited company but you are treated as if you are employed by them, then you will need to face the IR35 policy.
3. How will you know if you are considered as an employee?
The first thing you need to do if you want to know if IR35 applies to you, you need to work through HMRC’s business entity tests in order to know whether it applies to you.
For these tests, you need to give yourself a score and you need to keep evidence for your answer. In other words, you need to be honest in your business plans because they will check if you really made planned improvements on your business. For these tests, the lower you score, the more likely it is that IR35 will apply to you.
HMRC will always look at the whole picture. They tend to consider other crucial factors such as who has the control over the work. It is more likely that IR35 applies when your client tells you what to do, where to do it and when.
4. How do I mitigate the risk?
It is important to review the business entity tests and try to make sure your risk is as low as possible. Make your business more efficient to prove to the HMRC that your business is independent. This is also to make sure that you are not working for an employer with the same terms as your experience. An accountant can also help you with the IR35 work when it comes to a contract of services just to make sure that the HMRC will not raise dispute. Just bear in mind that the HMRC will look into your actual situation so be careful of the terms on the contracts. The HMRC will always verify and make sure that everything is genuine.
5. What’s the next step if IR35 applies to you?
If you are eligible to pay for tax under IR35, your limited company or partnership has to make a “deemed payment” to compensate for the National Insurance that would have been paid.
Always remember to seek advice to accountants with regards to this piece of legislation because it is very critical to your business. You should be aware of the consequences if you fail to identify yourself as eligible for the IR35 or not.
At Eclat Accountancy Ltd, you can be sure that our accountants can help you with it. Visit the website here and see our amazing services just for you!