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IR35 this, IR35 that - so just so I'm clear...what is IR35?

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I've seen sooooo many IR35 articles over the last 10 years. From IR35 rules to IR35 contracts, from IR35 calculators to IR35 umbrellas - the list goes on.

If I was a new to the market contractor, I'd be worried, very worried. Not only that I'd be totally daunted by the mountain of time, paperwork and IR35 research required to just to get your head around this stuff.

So here's the deal, i've been set a challenge - describe IR35 in 500 words or less. Now given the fact that i'm already 100 words in i'm kind of up against it already, so without any further ado, here's my take on IR35.

What is IR35?

It's a complex and often misunderstood piece of tax law that was introduced by the Labour government and came into effect on the 6th April 2000. According to IR35 guru, Dave Smith from Accountax, "the (IR35) legislation is poorly worded and creates massive uncertainty", and he's not wrong! For contractors, it is the single most important consideration when deciding when and how to remunerate yourself for all those hours spent working on assignment. As Smith states, "other than the poll tax, no other piece of tax legislation has received such orchestrated criticism and lobbying as IR35."

Right, thanks for that....so what is IR35?

It's a tax that effects freelancers, contractors, interims, temps and just about anyone that works on a non permanent basis. In essence, IR35 simply says that if a self employed contractor provides services to a client but acts and is controlled in pretty much exactly the same way as the client's direct employees, then he or she is a disguised employee of the client and should then be subject to the same tax and national insurance deductions as regular employees.

So how do I avoid IR35 (and prevent being a classed as a disguised employee)?

Four ways...

1. Make sure the services contract between you and the client contains all the necessary pointers towards self employment (pay particular attention to Direction, Control, and Mutuality of Obligation).
2. Sign an IR35 confirmation letter with your client stating (again for the record) exactly what the terms are and how you will perform your agreed activities.
3. If you truly are self employed and can carry out an assignment in the manner described in your contract, do exactly that and pay close attention not to deviate away from the T&Cs.
4. Take out IR35 insurance or become a member of the PCG (I'm not endorsing them of course, but they can very much look after you if the sh1t hits the fan. See Arctic Systems).

And to conclude my take on IR35

Don't take the p*ss. Bogus self employment helps nobody, particularly you in the long term. So if you are a disguised employee, take it on the chin, do the right thing and operate the deemed employment payment on your salary. You may also want to consider working through an umbrella company - they're alright you know.

For all those newbie contractors who are convinced of their self employed status, stick to the rules, keep your head down, seek professional advice and don't under any circumstances think that you are above the law (HMRC). They're not stupid and will catch up with you eventually if you're not fair game.

IR35 has been around for a long time, and until the Tories get into Government I'm certain we won't be seeing the back of it for at least another 2-3 years. This will give you more than enough time to re-read this article and then share it with all your friends. If I can save just one misguided contractor from the torture of an IR35 investigation then my work here will be done.

Further Reading:-

IR35 Rules - a 60 second summary, Who else needs IR35 Insurance?, What Every Freelance Contractor Should Know About IR35, High Street Accountants Struggle with IR35, Minister Refuses to Disclose IR35 Statistics, New Challenge to IR35, IR35 and the Law of Unintended Consequences, IR35 Stance Influences Voting

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© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.
Image: Heroes (Double Personality) by Shermeee

1st September 2009

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