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What Every Freelance Contractor Should Know About IR35

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If you are a freelance contractor and want to learn about IR35 then read this article. I'll be discussing the history of IR35, what impact it will have on your pay and give you 3 ways to avoid being caught by it.

HISTORY OF IR35

IR35 is a piece of tax legislation that was implemented in April 2000. It was brought in by Labour government to prevent what they described as 'disguised employment'. That is, contractors working in exactly the same way as a company's employees but paying themselves as if they were self employed. Reports suggest that since April 2000, HMRC have won less than 3% of their IR35 investigations. Although hugely unpopular and despite several calls for its abolition, IR35 remains law today.

WHAT IMPACT IR35 WILL HAVE ON YOUR PAY

There are several things that have an effect on your take home pay such as your tax code and the amount of allowable business expenses you can claim. Contractors that are not caught by IR35 will generally pay themselves a combination of salary, expenses and dividends. Contractors caught by IR35 should generally pay themselves salary and expenses only.

IR35 will reduce your after tax pay by about 15%. Contractors not caught by IR35 will generally take home something in the region of 80% of their gross invoice whereas contractors caught by IR35 will see this drop to something like 65% of their gross invoice.

3 WAYS TO AVOID BEING CAUGHT BY IR35

Check Your Contracts.

A correctly worded contract will contain the necessary pointers to self employment. These are RIGHT OF CONTROL, RIGHT OF SUBSTITUTION, BASIS OF REMUNERATION, TOOLS OF TRADE, TRADING STRUCTURE, FINANCIAL RISK, BUSINESS ORGANISATION, TERMS OF ENGAGEMENT AND MUTUALITY OF OBLIGATION.

If you're working through a recruitment agency, it's important to check not only the lower contract between you and the agency but also the upper contract between the agency and the client. Any discrepancies should be ironed out before commencing an assignment.

Sign an IR35 confirmation letter with your client.

These little gems can often be the difference between successfully defending and IR35 investigation or paying over thousands to HMRC in backdated tax and interest.

Get your client to put their name and signature to a document confirming your actual working practices which, together with your upper and lower service contracts will form a robust audit trail of your self employment status.

The Physical Contract.

IR35 contracts and confirmation letters are not that hard to agree but they must not be shams. Make sure you undertake the assignment in accordance with the signed contracts. HMRC will pay close attention to the actual physical engagement and not just what's stated in the contractual documentation.

SUMMARY

So there you go, IR35 in a nutshell and just about inside 1 minute. I thank you....

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