Guide to IR35 for IT Contractors

Guide to IR35 for IT Contractors

Whether you’re an IT contractor or you operate your own limited company you may already be familiar with the term, IR35.

If you're not too familiar with it, whether that’s because you’re just starting out as a contractor or simply want to refresh your knowledge then Technojobs is here with a guide to everything IT contractors need to know about IR35.

What is IR35?

IR35 was introduced by the government in April 2000 and is the name of the tax legislation that affects individuals working via an intermediary such as a company or partnership. IR35 only applies to anyone working for a client under circumstances that, if it were not for the imposition of the limited company or partnership (known as the “intermediary”) would be one of employment. This has been referred to as a “disguised employee” by HMRC and anyone working via an intermediary will be caught by these rules if they fail the ‘IR35 test.’ You can fail this if you have the same level of risk, responsibility, liability and control as a permanent employee.

What does IR35 mean for me?

Contractors caught by IR35 will have to pay full tax and National Insurance and will find that only a very limited set of expenses are reclaimable, which can result in less money earned. All the yearly income to the end of the tax year will be treated as a salary, therefore income tax and National Insurance will be due on the entire amount. The reason HM Revenue and Customs do this is because they believe you are not taking financial risks and do not have the same level of control as a director of your own limited company. Contractors should always seek professional advice before signing a contract, ensuring their contracts satisfy HMRC’s definition of ‘self employed’ work as per the IR35 employment rules.

What if I am affected by IR35?

If you fall under the rules because your contract and working practices look like you are inside IR35 you can still claim some expenses including travel and accommodation,  in addition to the provision for other intermediary expenses of 5% of your turnover. You can also benefit from the Flat Rate VAT scheme (which could save you around £2,000 a year);  so from a financial point of view it could be worth it and any other contract work should be put through your existing company.

How do I beat the IR35 rule?

You can show that you are self-employed which will require an IR35 friendly contract with working practices that match those stated in the contract, although you can get your contract renewed in advance of signing it.

Or you could simply do nothing. Many contractors have not addressed the IR35 issue with hopes that the legislation will be removed or believing that it doesn’t apply to them. Obviously this isn’t recommended as IR35 is law after all and contractors caught by these rules should make the right arrangements to meet the increased financial burden.

What kind of working practices and conditions do HMRC look for regarding IR35?

IR35 regulations are very complex and often ambiguous so these notes should provide a rough indicator.

  • Control – are you free to work under your own control and are not managed by the client?
  • Financial Risk – Profit share is common place in the employed world and is without exception in owner managed companies. Also, employees rarely risk financial loss by being employed, whereas if you buy certain assets or equipment or a client fails to pay you as director of your company you will most likely experience a financial loss.
  • Substitution – Is there a clause in your contract about using somebody other than yourself to perform the task you have been contracted to do?
  • Equipment Provided – Some companies prohibit the use of using your own equipment
  • Fixed Notice Period – HMRC will argue that this is like an employee, therefore there should be a provision in your contract for immediate termination.
  • Employee Benefits – You shouldn’t be receiving any kind of holiday pay, sick pay, pension, training courses or other perks designed for employees only.

How do I form my own limited company?

Forming your own limited company can be done online and doesn’t take long at all. You just need a company name (you will need to check availability first) and a credit card to complete the transaction. You will also be prompted for pieces of information online which will include director details (this is you), registered office address, secretary details and any shareholders as you will need to allocate shares in the company.

There will also be requirement to appoint your accountants. If you don’t already have someone in mind you should look for individuals with the right qualifications or a specialist contractor account.