The rules around employment versus contracting are always changing and IR35 status can be hard to pin down.
Falling within IR35 means you’ll be subject to taxation in the same way as an employee, even if you consider you have a third party relationship. You’ll pay National Insurance contributions and income tax as if you were employed, significantly reducing your take-home pay.
Here’s a checklist you can run through to make sure you won’t fall foul of the rules.
You’re a business in your own account
If you’re a business in your own account, then you’re eligible to fall outside of IR35, so long as you meet certain other criteria.
To determine whether or not you pass this hurdle, check HMRC’s nine “badges of trade” tests.
The first indication is whether you’re aiming to make a profit, as opposed to offering your services as a hobby. We expect that most contractors will pass this test.
If you’re making systematic and repeated transactions, that’s another indication that you’ll be considered as a business in your own account.
But your status as an employee or a contractor doesn’t simply rest on this test. Read on to check some of the other factors to consider.
Ability to sub-contract
As a contractor, you’re able to sub-contract the services if you wish.
If your relationship with the client is such that they require you to do the work personally, then your agreement starts to look more like an employment contract.
Freedom to decline work
Contractors can pick and choose their work. If you’re too busy, or you just don’t fancy that particular project, then you have no obligation to accept it.
Using your own equipment
Using your own equipment points to a contractor-style relationship.
For example, if you’re a creative and you use your own laptop for work, you’re less likely to be considered an employee of your client. Employees will generally use equipment provided by the employer.
You may be required to use the client’s equipment for some reason, such as safety and security concerns.
Where that’s the case, see if you can include the reason in a clause in the contract, and expressly state that it does not give rise to an employment relationship.
While this isn’t fool-proof in determining your IR35 status, it helps to indicate that you’re a contractor.
You provide quotes for your work
While employees are paid a regular monthly salary, regardless of how busy they are each month, contractors quote for each job they carry out.
One of the pitfalls here for contractors is the opportunity to work on retainer for a client. Long-term retainers can start to look more like employment contracts and bring you within the IR35 categorisation.
To minimise that risk, make sure your relationship with the client looks like a contractor from every other angle if possible. If you tick enough of the other boxes to indicate that you’re a contractor, then you may remain outside of IR35. It’s assessed in the round.
You don’t need to decline all retainer work. Just make sure that you’re clear on the working relationship and all the other factors we’ve listed here.
No employee benefits
Contractors are not entitled to the benefits that employees receive. That’s a trade-off for the tax benefits in being self-employed. So make sure that you haven’t somehow become enrolled on a pension scheme, or a private medical insurance scheme.
More subtly, a benefit might look like a parking space, or use of the canteen, or taking part in a sports club. To make sure you stay on the self-employed side of IR35, it’s best to decline those perks, if you’re offered them.
This is often a knotty area and we can help to make sure that you don’t inadvertently fall foul of the rules and end up paying more tax than you expected.
Give us a call if you’d like help to determine your IR35 status.