IR35 is a tax law that was introduced in 1999 but is still poorly understood, criticized and abused. It was intended to ensure workers aren’t avoiding tax by supplying their services through an intermediary company, but who would otherwise be employees of the business they are providing services for.
It’s a much embattled law, which has caused problems for contractors who have been labelled ‘disguised employees’ by the government and seen either penalties or a significant drop in their take home pay as a result of being put onto an IR35 contract. Indeed, from April 2017 contractors have not been able to decide their own IR35 status.
The intention here is to make sure contractors and businesses don’t avoid paying taxes they should otherwise incur, and also to make sure contractors who are treated as employees get all the protections and employment rights they would enjoy if they were directly employed by the company.
If you’re investigated by HMRC, you need to be able to demonstrate that you are legitimately self employed and so do not fall under the IR35 regulations. There are a few simple things you can do to make sure you won’t fall foul of this. The first is talking to a lawyer: for a small fee, an employment lawyer can conduct an IR35 contract review and make sure you are in the clear. If not, you may be able to negotiate with your client to make the terms of contract clearer, should it be investigated.
If this is not an option, there are some other steps you can take. One of the easiest things you can do is take out business insurance to cover you as a sole trader or one person small business. Comprehensive business insurance is available for as little as £20 a month and strengthens your IR35 position considerably.
Similarly, having some stationary printed up for your business, like business cards and headed notepaper helps to create an image that you are legitimate business. These small indications add up in an HMRC investigation and could make all the difference.
Finally, it may be more advisable to work with private clients rather than those in the public sector. IR35 covers the public sector, to ensure it’s not abused and brought into disrepute. Tax law for privately funded business is less restricted and gives contractors a freer hand to find the work they need.