One of the main benefits of being a self-employed contractor is that tax exposure can be minimized. Contractors can take advantage of tax breaks. However, this information can confuse new contractors.
IR35 is a tax legislation used by HMRC in determining the real employment status of a contractor. HMRC uses this to determine if the contractor is self-employed, or is just a disguised employee. There are instances when the rules are complex and unclear. Thus, this results in contractors being found inside IR35.
The parameters that HMRC use in determining whether a person is self-employed involve being able to determine when, where, and how they work. If a person has fixed hours, cannot be replaced by a substitute, or needs permission for annual leave, then that person is a ‘disguised employee.’
If the contractors are subject to an IR35 inquiry and the contractor is found to be a disguised employee, then he has to pay fines and pay back the tax.
This is perfect for married couples where one spouse is a contractor and the other does not work. The married couple can limit their tax liability by using the non-working spouse’s lower rate tax threshold and tax-free allowance.
Couples can reduce the overall tax burden by doing income shifting. This means splitting some of the income. It is significant that these settlements are done within the S660 boundaries.
It is possible that if a freelancer contracts his services through a limited company, then the spouse might do the bookkeeping. The spouse can be paid for the task by the company, or be provided dividends from the profits of the company.
Many contractors utilized offshore strategies to reduce their tax liabilities, until 2008.
Contractors would sell their services through offshore companies in the Isle of Man or Jersey. These contractors would be paid into an offshore account at very low tax rates, then send their money back to their UK account.
However, Budget Note 66 was introduced by the Government in 2008. This closed the loophole to enforce the principle that residents of the UK should pay UK income tax. The bad news was that HMRC backdated these changes so that contractors had to repay any back taxes owed since 1987.
It is worth noting that there are laws that are legal right now, that might not be legal in the future. Our top experts can help you with your employment status.