IR35 is a set of tax rules in the United Kingdom that determines whether a contractor is considered an employee for tax purposes. If a contractor is deemed to be an employee, they are subject to the same taxes and National Insurance contributions as an employee, even if they are working through their own limited company.
There are a number of factors that HMRC will consider when determining whether a contractor is inside or outside IR35, including:
- The level of control that the client has over the contractor
- The degree of financial risk that the contractor takes
- The nature of the relationship between the contractor and the client
If a contractor is found to be inside IR35, they will be taxed as an employee, even if they are working through their own limited company. This can have a significant impact on their tax bill, as well as their ability to claim certain tax reliefs.
There are a number of things that contractors can do to avoid IR35, including:
- Ensuring that they have a genuine contract for services
- Taking on a high level of financial risk
- Having a high degree of control over their work
- Building a strong working relationship with their client
Avoiding IR35 can be complex, but it is important for contractors to understand the rules and take steps to avoid being caught inside.
1. Control
The level of control that the client has over the contractor is a key factor in determining whether a contractor is inside or outside IR35. If the client has a high degree of control over the contractor’s work, this is an indication that the contractor is an employee. This is because one of the key factors that HMRC will consider when determining whether a contractor is inside or outside IR35 is the level of control that the client has over the contractor’s work.
There are a number of things that contractors can do to avoid being caught inside IR35, including ensuring that they have a genuine contract for services, taking on a high level of financial risk, and having a high degree of control over their work.
By understanding the importance of control in the context of IR35, contractors can take steps to protect their tax status and avoid being caught inside IR35.
2. Substitution
The ability of a contractor to substitute another person to do their work is an important factor in determining whether the contractor is inside or outside IR35. If a contractor is able to substitute another person to do their work, this is an indication that the contractor is not an employee. This is because one of the key factors that HMRC will consider when determining whether a contractor is inside or outside IR35 is the level of control that the client has over the contractor’s work.
There are a number of ways that contractors can ensure that they are able to substitute another person to do their work. One way is to ensure that they have a contract that allows them to do so. Another way is to ensure that they have the necessary skills and experience to do the work themselves.
By ensuring that they are able to substitute another person to do their work, contractors can take steps to avoid being caught inside IR35.
Example: A contractor who is a software developer may be able to substitute another software developer to do their work. This is because software development is a skilled profession that requires specialized knowledge and experience. The contractor would need to ensure that the person they substitute has the necessary skills and experience to do the work.
Conclusion: The ability of a contractor to substitute another person to do their work is an important factor in determining whether the contractor is inside or outside IR35. By ensuring that they are able to substitute another person to do their work, contractors can take steps to avoid being caught inside IR35.
3. Financial risk
The degree of financial risk that a contractor takes is an important factor in determining whether the contractor is inside or outside IR35. If a contractor takes a high degree of financial risk, this is an indication that the contractor is not an employee. This is because one of the key factors that HMRC will consider when determining whether a contractor is inside or outside IR35 is the level of control that the client has over the contractor’s work.
There are a number of ways that contractors can take on a high degree of financial risk. One way is to invest in their own equipment and materials. Another way is to take on contracts that are not guaranteed to generate income.
By taking on a high degree of financial risk, contractors can take steps to avoid being caught inside IR35.
Example: A contractor who is a self-employed builder may take on a high degree of financial risk by investing in their own tools and equipment. This is because the builder is not guaranteed to generate income from every contract that they take on.
Conclusion: The degree of financial risk that a contractor takes is an important factor in determining whether the contractor is inside or outside IR35. By taking on a high degree of financial risk, contractors can take steps to avoid being caught inside IR35.
4. Mutuality of obligation
Mutuality of obligation is a key factor in determining whether a contractor is inside or outside IR35. If there is no mutuality of obligation, this is an indication that the contractor is not an employee. This is because one of the key factors that HMRC will consider when determining whether a contractor is inside or outside IR35 is the level of control that the client has over the contractor’s work.
There are a number of ways that contractors can ensure that there is no mutuality of obligation. One way is to ensure that they have a contract that does not oblige the client to provide work. Another way is to ensure that they are not financially dependent on the client.
By ensuring that there is no mutuality of obligation, contractors can take steps to avoid being caught inside IR35.
Example: A contractor who is a freelance writer may not have mutuality of obligation with their clients. This is because the writer is not obligated to accept every contract that is offered to them, and the clients are not obligated to provide the writer with work.
Conclusion: Mutuality of obligation is a key factor in determining whether a contractor is inside or outside IR35. By ensuring that there is no mutuality of obligation, contractors can take steps to avoid being caught inside IR35.
FAQs on How to Avoid IR35
This section provides answers to frequently asked questions about how to avoid IR35.
Question 1: What is IR35?
Answer: IR35 is a set of tax rules in the United Kingdom that determines whether a contractor is considered an employee for tax purposes.
Question 2: Why is it important to avoid IR35?
Answer: If a contractor is deemed to be an employee, they are subject to the same taxes and National Insurance contributions as an employee, even if they are working through their own limited company.
Question 3: What are the key factors that HMRC will consider when determining whether a contractor is inside or outside IR35?
Answer: The key factors that HMRC will consider include the level of control that the client has over the contractor, the degree of financial risk that the contractor takes, the nature of the relationship between the contractor and the client, and the mutuality of obligation.
Question 4: What are some things that contractors can do to avoid IR35?
Answer: Contractors can avoid IR35 by ensuring that they have a genuine contract for services, taking on a high level of financial risk, having a high degree of control over their work, and building a strong working relationship with their client.
Question 5: What are the consequences of being caught inside IR35?
Answer: If a contractor is found to be inside IR35, they will be taxed as an employee, even if they are working through their own limited company. This can have a significant impact on their tax bill, as well as their ability to claim certain tax reliefs.
Question 6: Where can I get more information about IR35?
Answer: You can find more information about IR35 on the HMRC website.
Summary: Avoiding IR35 can be complex, but it is important for contractors to understand the rules and take steps to avoid being caught inside. By following the tips in this FAQ, contractors can protect their tax status and avoid the potential consequences of being caught inside IR35.
Next Steps: If you are a contractor and you are concerned about IR35, you should speak to an accountant or tax advisor to get advice on your specific situation.
Tips to Avoid IR35
IR35 is a set of tax rules in the United Kingdom that determines whether a contractor is considered an employee for tax purposes. If a contractor is deemed to be an employee, they are subject to the same taxes and National Insurance contributions as an employee, even if they are working through their own limited company.
There are a number of things that contractors can do to avoid IR35, including:
Tip 1: Ensure that you have a genuine contract for services
A genuine contract for services is a contract that sets out the terms of the agreement between the contractor and the client. The contract should clearly state that the contractor is self-employed and that they are not an employee of the client.
Tip 2: Take on a high level of financial risk
Contractors who take on a high level of financial risk are less likely to be considered employees. This is because employees are typically not responsible for the financial risks of the business.
Tip 3: Have a high degree of control over your work
Contractors who have a high degree of control over their work are less likely to be considered employees. This is because employees are typically subject to the control of their employer.
Tip 4: Build a strong working relationship with your client
Contractors who build a strong working relationship with their client are less likely to be considered employees. This is because employees typically have a close working relationship with their employer.
Tip 5: Get advice from an accountant or tax advisor
If you are unsure about whether or not you are inside IR35, it is important to get advice from an accountant or tax advisor. They can help you to understand the rules and to take steps to avoid being caught inside IR35.
Summary: Avoiding IR35 can be complex, but it is important for contractors to understand the rules and take steps to avoid being caught inside. By following the tips in this article, contractors can protect their tax status and avoid the potential consequences of being caught inside IR35.
Next Steps: If you are a contractor and you are concerned about IR35, you should speak to an accountant or tax advisor to get advice on your specific situation.
In Summation
IR35 is a complex set of tax rules that can have a significant impact on the tax status of contractors in the United Kingdom. By understanding the rules and taking steps to avoid being caught inside IR35, contractors can protect their tax status and avoid the potential consequences of being caught inside IR35.
This article has explored the key factors that HMRC will consider when determining whether a contractor is inside or outside IR35, and has provided a number of tips that contractors can follow to avoid IR35. Contractors who are concerned about IR35 should speak to an accountant or tax advisor to get advice on their specific situation.
