How can I avoid IR35?

Contractors: How to avoid IR35 and new reforms

 

To help every contractor understand the upcoming changes to IR35 legislation and how you can avoid getting caught out, in this guide Umbrella Supermarket outlines 6 ways you can avoid IR35 in 2021.

What is IR35?

Let’s start by looking at what IR35.

IR35 is a piece of legislation that was introduced in 2000 to stop workers such as contractors from working as ‘disguised employees.’ This was a way of targeting workers that offered their services in a way which allowed them to take advantage of tax benefits enjoyed by the self-employed, but who actually operated more like employees.

Under the legislation, it was the responsibility of the contractor themselves to determine their own IR35 status.

However, this changed when HMRC decided that too many companies were not compliant.

From 2017, it became the responsibility of the client to determine the contractor’s IR35 status in the public sector.

This meant that many public sector contractors were considered inside IR35, regardless of their actual circumstances., and it became the responsibility of the client to deduct the contractor’s tax and National Insurance from their fee before it was paid to them.

The problem lies in the fact that many of these public-sector clients weren’t correct in their IR35 assessments, meaning many contractors paid more in PAYE tax and National Insurance contributions than they needed.

These contractors effectively paid tax as if they are an employee, but didn’t enjoy the benefits of being an employee such as receiving holiday pay, sick leave, maternity/paternity leave and a workplace pension.

Upcoming changes to IR35

The bad news for thousands of self-employed contractors in the private sector is that from April 6th 2021, these rules are set to roll out in the private sector too.

These changes were initially set to come into force from April 2020, but this was postponed due to the COVID-19 pandemic.

From April, it will become the responsibility of private sector clients to establish contractors’ IR35 status. This is set to badly impact the 170,000 limited company contractors out there.

What’s more, if you are caught to be operating as a ‘disguised employee’, you may be subject to a long and expensive IR35 investigation which can incur penalties, stress and hassle.

How to avoid IR35

Clearly, no contractor wants to get caught out by IR35.

To avoid IR35 you must be genuinely operating on your own and double check your contract.

Here are a few things to look out for to determine whether you will be considered as inside or outside IR35 rules:

Define who’s in charge

Contractors are hired to undertake a specific task and should only carry out the work outlined in their contract.

That means the client shouldn’t have the power to move them from task to task or be able to tell the contractor how to complete their work as an employer would. This also means there should be no specific working hours or days outlined in the contract as this may imply to HMRC that you work more like an employee than contractor.

Mutuality of obligation

Mutuality of obligation is a working relationship where an employee takes on any work their employer gives them.

If you want the contract to remain outside or IR35, you must be able to ensure that it lets you refuse work and grants freedoms, such as taking on other projects at the same time.

If the client does offer you more work that is fine, but you will need to have a new contract drawn up and it should be treated separately.

The right to substitute

If you can’t undertake the contract at hand for any reason, as a contractor you are allowed to bring in a substitute to do the work for you.

A right to substitution clause in the contract clearly indicates that you really are a contractor and therefore this should be clearly stated.

Is the role exclusive?

Exclusivity clauses are typical of employment contracts, however this shouldn’t be the case for contractors.

A contract that stops the contractor from working with other clients whilst undertaking the role at hand can raise red flags to HMRC.

Ensure you aren’t named in the contract

Make sure you always work as a contractor offering business to business services and aren’t named personally in the contract itself or in any correspondences relating it to.

Go Umbrella

The final way you can avoid IR35 is by going umbrella.

An umbrella company will employ the contractor, thereby giving them statutory rights like holiday pay, sick leave, maternity and paternity leave and a workplace pension. The company will invoice the client on the contractor’s behalf and pay them a salary, processing their tax and National Insurance contributions through PAYE.

As the umbrella’s employee, you will be automatically exempt from IR35. This is great news for contractors, meaning they don’t need to worry about getting caught up in complications.

If you think this will be the easiest route for you following changes to IR35 later this year, the next step is to find the best umbrella company for you. That’s where Umbrella Supermarket’s umbrella calculator comes in handy.

Use Umbrella Supermarket’s Umbrella Calculator to help

Simply enter a few key details, such as your contractor rate and preferences, and our handy contractor calculator will generate a list of the best-suited umbrella companies for your needs.

We make it quick and easy to find the perfect umbrella company, ready to see what we can do for you today?

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