Basically IR35 has an affect on contractors who don't meet HMRC criteria in order to be deemed “self-employed” by their definition. This rule can mean an increase in tax rates as well as N.I liability and further will stop contractors from holding on to profits in order to invest in future growth.
Unfortunately this means all contractors falling under IR35 will be required to file a tax return for taxation and may be liable for N.I (National Insurance) after reporting deductions and expenses. Their income them will be termed as a “deemed payment” that follows these deductions. These companies will have a combination of IR35 turnover as well as turnover that is unrelated IR35. That means the IR35 rules will not apply to that the cash income and other earnings associated with contracts that aren't regulated.
Some of the usual Section 198 terms will still apply so you may be able to still claim most of those expenses. Furthermore there are provisions for other expenses that are classified as intermediary and this can be claimed in addition to the 5% allowance. These might include:
Pensions – either personal or executive
Business related travelling expenses – Must have occurred during the execution business duties
Subsistence – Meals and other away from home expenses
Professional Indemnity cover
- Benefits in kind – fringe benefits like private medicinal coverage
Training expenses do not qualify as part of this allowance. If contractors are unsure of their status under IR35 they should consult a legal professional. If you do fall under these regulations you may be able to adjust your work practices in order accommodate an “IR35-friendly” approach in order to escape the regulations.
Are you 'Self Employed'?
First and foremost you must establish whether you are considered 'employed' or 'self employed' under HMRC’s terms. There is some ambiguity in the “employment status” guidelines, which seems to help very little.
They state that they will most likely conduct an overall evaluation of the contracting entrepreneurs position to determine which category of employment applies to them under their rules. Any amended contracts then, should be reflected in your general work practices.
If you are able to make the appropriate adjustments it's in your best interest to be deemed in this case as “self-employed” so it may be best to explore how you can diversify or change your business model in order to accommodate.
There Are a Few Loopholes
- If you can show yourself as “self employed” this is the best option you can pursue. You will need to try and establish an “IR35 friendly contract”, with work practices that match those standards.
- Contract overseas-sometimes location is the best way to adjust your tax status. Set up in sunnier climate for fairer weather and fairer taxes. There are many reasons to contract overseas in addition to taxes for example lower living costs. Beware however that for what reason you're moving overseas taxes are often even more complicated in the U.K depending on your situation so always consult a tax specialist.
- Become permanent: You could become a permanent contractor especially if it's something you love and are good at it. Just make sure you consider the other two options beforehand. Some contractors prefer to go permanent, to escape the uncertainty of IR35 and for a more secure career future.
- Doing nothing: Many contractors have tried to ignore this legislation hoping it will go away, unfortunately this is probably the worst option available. It's better to prepare yourself for what's coming so you can make the best financial arrangement to bear the brunt of the burden.