What if IR35 rules apply to your contracts?

Being a contractor affords you the freedom to run your own business and therefore to manage your working hours and the projects you deliver to your clients. However it also means that you have to deal with payroll and accountancy matters, and to consider whether you fall within or outside IR35 rules. How would I know if IR35 applies to me?

As a general rule, it affects those who provide services to clients via an intermediary (for example, a personal service company) and works to determine whether or not a contractor is effectively a disguised employee. The scheme was brought in to prevent tax avoidance and, depending on whether or not the criteria it imposes is found to apply to you, it can have a significant impact on how much national insurance and income tax you pay.

If it can be established that, were it not for the existence of the intermediary you operate through, you would have been deemed an employee, you could find you are affected by IR35. This could mean, among other things, that the client has a right of control over the way you do the work and that in other words you have to work at your client’s premises, you can only work on one contract at a time and have no right to appoint a replacement. You may have the scope to earn overtime pay and incur no financial risk at all. However, you are unlikely to be regarded as an employee of a client and therefore not subject to IR35 if you have the final say in how and where the work is carried out and you are working on several projects simultaneously.

It’s also worth asking yourself whether you are free to hire other people to assist you with the work that you’re taking on and whether you are taking financial risks, such as investing in your own training or equipment, or having to maintain insurances and to put right defective work. Assuming that you can do this, it is quite likely that you are not an employee and will not fall within IR35 regulations.

Of course, the contract that you have with one client may not always be the same for other clients, so it’s important that each contract is looked at individually. It may be that work on one assignment could be classed as traditional employment, while work on other assignments would not be caught up within IR35 legislation.

Let’s assume the work you do is deemed to come under IR35. If so, using the services of an umbrella company such as PayStream means that we will ensure that the right levels of national insurance, income tax and Pay As You Earn contributions are taken off before you are paid.

Additionally, as all of your accounting affairs will be taken care of by a team of experts you will be free to devote more time and energy towards working on your projects, safe in the knowledge that you’ll be meeting your tax obligations and in a position to maximise your take-home earnings. It may even be the case that you can benefit from tax relief on expenses in areas such as travel costs and professional indemnity insurance premiums.

As you can see, there are a number of factors that you need to consider in order to establish whether IR 35 applies to you or not. If you are not sure and are looking for professional assistance on IR35 compliance, it’s worth getting in touch with an accountancy service provider for advice.

If you’re a contractor, what have your experiences of IR35 compliance been like? Please share your thoughts by leaving a comment below.