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IR35 guide2013/2014

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IR35 guide 2013/2014

Do you provide your services without employment?

If so, do you use a limited company or partnership as an intermediary to

provide those services through?

If the answer is yes, then you will need to prove that you are not using your

limited company as a buffer to what essentially would be direct employment

with the end client.

Why do you need to provide proof? Well, depending on your term of

engagement - whether through a limited company or as an employee,

the amount you pay in tax differs - and HMRC wants to make sure the tax

you pay accurately reflects your employment situation. The IR35 rules were

introduced to police this behaviour.

IR35 is notoriously complicated to grasp and, when trying to wrap your head

around this complex legislation, online information and even HMRC’s own

guidance can often be more misleading than helpful.

In collaboration with IR35 specialists Qdos, this guide will explain IR35 in

simple terms, and provide a few scenarios to better equip you to understand

if you’re paying tax correctly under IR35.

Contents:

• What’s IR35 and why is it so important?

• Am I an employee or a contractor?

• Considering your position

• IR35 in the Public Sector

• Business entity test & compliance checks

• How Qdos can help

• FAQ

Terms:

Self-employed: You can be called a freelancer, sole trader

or contractor and you operate outside of employee status.

Personal Service Company: A company that sells the work

or services of an individual (or group of individuals) that is

owned and operated by that individual (or group

of individuals).

Employee: You will have a permanent contract whereby you

receive a salary and benefits and your employer deducts

PAYE and National Insurance Contributions from your wage.

You also have employment rights.

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What’s IR35 and why is it so important?

A very brief history - IR35 was introduced in the year 2000 to combat

employees who disguised themselves as personal service companies in

order to reap the tax benefits of operating as a contractor, as opposed to an

employee.

Through a limited company you are able to split your Income Tax and

National Insurance Contributions favourably between a low salary below

the tax threshold of £7696 (2013/14), and a basic rate dividend with lower

Corporation Tax at £30,000 – thereby achieving a tax free income of £37,996.

Conversely as an employee you will be placed on your employer’s Payroll,

and will have PAYE Income Tax and National Insurance Contributions

deducted from your salary at source.

Essentially the regulations are there to determine whether, if not for your

limited company, you would in fact be an employee – in which case you will

need to pay tax accordingly.

Breaking it down: IR35 determines if you’re an employee of the client or a

limited company contracting your services to that client.

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Am I an employee or a contractor?

You might imagine this would be a fairly straightforward process - ‘If I have a

limited company and the work isn’t permanent I’m therefore a contractor.’

Well, unfortunately it isn’t that black and white, and there’s a variety of

questions you should ask to gauge your true status. It’s important to

remember that there is no definitive ‘rule’ to IR35 and if you can convincingly

justify your reasons you won’t be placed on Payroll as an employee.

HMRC are becoming fairly militant with regards to IR35 enforcement and

trying to move the majority of limited companies - particularly in the Public

Sector - onto Payroll. You don’t need to be pushed around by their bullish

approach, just ensure you can substantiate your claim as a legitimate

contractor.

The first thing to consider when approaching IR35 is whether your work

is controlled and directed by you, or if you are subject to an employer /

employee relationship.

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Considering your position

Background:

When you are contracted to provide a service through your limited company,

you need to consider if you have simply replaced another worker who was

an employee.

If you have, then you are likely to be caught by IR35, as your limited company

is disguising the conduct of your duties as an actual employee.

Are you filling someone else’s shoes - someone permanent?

Drafting your own contract:

When you create a contract yourself you should have it verified by a

specialist, to ensure that it doesn’t fall into any existing IR35 mandates. As a

limited company the responsibility of compliance (paying tax correctly) is

yours alone, and not the clients.

Don’t sign your soul away.

Control & supervision in the workplace:

Even though your limited company has been contracted to provide a

service, you maintain control over your working conduct during that time -

whereas an employee would be subject to their employer’s direction.

Principles to look out for in your contract are:

• Start and finish times appearing in the contract.

• Specific days the contractor should work in the contract.

• Allocated lunch time breaks and their duration in the contract.

• Any direct clauses which dictate that the client has supervision and

control over the contractor.

These fundamentals should not feature in a business to business contract

where a client employs your services as a limited company.

No one should tell you what to do; only what they want you to do!

Substitution:

A good way to ensure you’re not caught by IR35 is if your contract allows

you to supply a substitute or take on someone else to conduct your services.

If the client has explicitly stated that you personally must conduct the

contracted services then it may prove more difficult to argue against being

caught by IR35.

Are they hiring your company, or you personally?

Financial records:

As a contractor you should receive payment by invoicing your clients. As an

employee you will receive payments from your client before you invoice, as

a wage!

Is this a coincidence that this happens every month?

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Level of involvement - ‘part & parcel’

HMRC will keep a watchful eye on how involved you are with a client’s

corporate structure and your responsibilities within its operations. If you have

the client’s staff reporting to you, or appear on telephone lists, then this won’t

reflect well on your IR35 liability.

Even little things like obtaining a security pass to your client’s business, to

avoid having to sign in every time you work, can contribute to being caught

within IR35.

Make sure there’s a clear dichotomy between your services and the client’s

business, and that you are not part and parcel to their operations.

Don’t get too involved, it will only end in tears.

Blacklisted:

If anything screams ‘consult a specialist’, it’s your client having past rulings in

which contractors previously engaged by them have been caught by IR35.

Make sure your contract is watertight, as the responsibility to pay tax correctly

will reside with you!

Beware the black mark!

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Alternative work:

Does the contract allow you to take on jobs from other clients, or does it

stipulate that you must exclusively complete the task at hand over any other

work? Are you bound by your contract to complete the work your client is

giving you?

Can you have your fingers in lots of pies or is it cake alone?

Equipment:

You should have your own equipment available to conduct your services.

However, IR35 legislation will take into consideration that you’re often required

to use a client’s equipment for safety, security or practicality reasons. If there’s

a sound business reason that mitigates your use then it’s usually accepted.

Sharing isn’t always caring.

Liability & Insurance:

If the work you’ve been contracted to complete is unsatisfactory then you are

likely to be liable if you’re an independent contractor.

In most scenarios you’re going to need your own private insurance as you

won’t be covered by company insurance as a contractor.

Is it your neck on the line?

IR35 in the Public Sector

In 2012 HM Treasury decided to lead by example on IR35 and tightened the

regulations towards contractors working off-Payroll in the Public Sector.

Under the new rules, any contractor whose position is the most senior in a

department is automatically placed on Payroll.

Any contractor who has been working in a position for more than 6 months

and earning in excess of £220 a day will be legally obligated to provide

assurance (from a specialist) that they are not caught by IR35 and are

paying the correct amount of tax.

The responsibility to request assurance resides with the ‘client’ or ‘employer’

and although they’re legally obligated to do so, there is no consistency

across the Public Sector of departments actually requesting this.

If you refuse, or fail to provide, accepted assurance that you are paying your

tax correctly, your contract may be discontinued, or you may be placed on

departmental payroll.

Even once you’ve submitted assurance from a specialist, a client can legally

make the decision to reject your provision unless the assurance is supplied

from HMRC.

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PII (2 points)

Do you need professional indemnity insurance?

Efficiency (10 points)

Has your business had the opportunity in the last 24 months to increase

your business income by working more efficiently? One way of doing this is

finishing a fixed-price contract early.

Assistance (35 points)

Does your business engage any workers who bring in at least 25% of your

yearly turnover? If your intermediary is a company, these workers need to be

people other than directors or shareholders of the company.

Advertising (2 points)

Has your business spent over £1,200 on advertising in the last 12 months?

Entertainment does not count as advertising.

Previous PAYE (15 points)

Has the current end client engaged you:

• on PAYE employment terms

• within the 12 months which ended on the last 31 March

• with no major changes to your working arrangements?

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Business Entity Tests & Compliance Checks

By answering a series of questions provided by HMRC you can determine

whether you are at a low, medium, or high risk of an IR35 investigation.

Business entity tests do not, contrary to what many people believe, determine

whether you are caught by IR35 and should only be used to assess a

contractor’s risk, not their status!

The results can be kept anonymous from HMRC if you choose, so whichever

bracket you fall into is for your eyes only.

To gather a complete overview of your company, HMRC ask a series of

questions regarding your operations and tally up a score depending on

your response.

Less than 10 points

Between 10 and 20 points

Over 20 points

High risk

Medium risk

Low risk

Business Premises (10 points)

Does your business own or rent business premises which are separate both

from your home and from the end client’s premises?

Business plan (1 point each)

Does your business have a business plan with a cash flow forecast which you

update regularly?

Does your business have a business bank account, identified as such by the

bank, which is separate from your personal account?

Repair at own expense (4 points)

Would your business have to bear the cost of having to put right

any mistakes?

Client risk (10 points)

Has your business been unable to recover payment:

• for work done in the last 24 months

• more than 10% of yearly turnover?

Billing test (2 points)

Do you invoice for work carried out before being paid and negotiate

payment terms?

Right of submission (2 points)

Does your business have the right to send a substitute?

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Actual submission (20 points)

Have you hired anyone in the last 24 months to do the work you have

taken on?

You could do this by sending someone to do the work in your place. You

could also do this by sub-contracting. But your business has to remain

responsible for the work and for paying the person who does the work you

have taken on.

Call it what you will, it’s essentially a made up set of purposely obscure rules

to grant HMRC free reign to investigate who they want.

How Qdos can help

Don’t be pushed around by the Tax Man’s boorish approach and reassure

yourself with some professional advice from our partners Qdos.

Qdos provide a wide range of products and services for contractors in the

UK and are one of the UK’s most respected experts in tax status, having

defended contractors in over 1,300 IR35 enquiries.

They offer a number of insurance products, including comprehensive IR35

cover, which can all be purchased online in minutes.

FAQ

Someone oversees my work, does this mean I’m caught by IR35?

Supervision or quality control is not a strong enough case to force IR35 - there

has to be a master to servant work dynamic.

What exactly is meant by ‘control’?

Control is usually displayed by the power to delegate over your work.

What happens if I’m on a retained fees contract?

If a client pays a fixed sum to you as a contractor to keep you on stand-by in

case your emergency services may be required, you may be caught by IR35

if the client is exercising control over the contractor.

Can I be caught by IR35 if I’m no longer working for that client?

Accountants don’t remind their customers enough that your IR35

responsibilities can be backdated and even though it may be harder for

HMRC to prove you were an employee they can still try.

This document contains guidance only and is not a substitute for tailored advice from a Crunch

accountant. Contact your Crunch Account Manager for advice pertaining to your specific business

and situation. All content is copyright E-Crunch Ltd 2013.

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