It's not always easy for contractors. Trying to make a living is tough enough, but when an individual provides his personal...
There are numerous reasons why people choose to work for themselves via a LTD company. For some it’s an option to earn an extra income for themselves by working in their free time to top up the salary from their day job. For others, the prospect of operating as a freelancer or contractor via limited company rather than as sole trader is more tax efficient. Unfortunately, where those working in this way frequently find themselves seeking the services of an Insolvency Practitioner is when HMRC invoke IR35 legislation after deeming that their choice to incorporate is disguised remuneration.
What is IR35 and Disguised Remuneration?
Freelancers and contractors can, in the right circumstances, keep more of their earned income if they take advantage of the various concessions offered within the tax system and additionally, some agencies and companies which engage the services of such individuals won’t do so directly, thus avoiding an employer/employee relationship, with all the implications that brings.
When one company contracts another (in this case to engage the services of that company’s only staff member) it creates a relationship which, while not being employment, is very close and if HMRC decides that the relationship is so close that it makes no difference, it can make the determination that the ‘contractor‘ is only working via a limited company to disguise their employment and as such, IR35 allows the Revenue to pursue the various taxes and NI payments it would have received in a more ‘normal’ working relationship.
How Might I get an IR35 Notice?
Getting an IR35 notice means that a contractor may lose up to 25% of the value of the contract through having to pay income tax and national insurance contributions. HMRC can also go back for 6 years and may demand backpay on any other contracts it deems to be employment.
In order to assess the likelihood of being caught out, it’s worthwhile for contractors to look at the relationships between their own company and the business contracting it. The three principles which hint at employment are ‘Control’, ‘Substitution’ and ‘Mutual Obligation’. Essentially if the work of the contracted worker is under too much control by the client, if they’re not free to send someone else in should the need arise, or if the contract obliges the client to provide work and obliges to the contractor to do it, then HMRC may well consider the relationship to be employment.
Can I Challenge and IR35 Notice?
While there is an avenue to challenge an IR35 notice, it’s often so time consuming and stressful that many contractors simply accept it, pay up and move on, or if they can’t afford it, liquidate and re-incorporate. After all, when contracting, time is money and there comes a point where the money saved challenging a determination is less than the money lost due to the time spent pursuing it.
If you’ve received an IR35 notice and need an objective assessment of the best options to take, we offer a free consultation and a guide as to what to do next based on our significant experience of cases just like yours. Contact us to make an appointment and let us guide you to the best option for you you and your particular circumstances.