If you wait until after you have signed a contract to start addressing IR35 issues then you are most likely too late. And that decision may just have cost you thousands of pounds in extra tax. Sticking your head in the sand and being lazy is a costly business when it comes to beating IR35.
If you wait until after the contract is signed then:
- You significantly increase your chances of being caught by IR35 when HMRC investigate.
- You have no bargaining power left to get important changes made to your contract.
- You may have just wasted thousands of pounds in future tax payments.
This guide will tell you the best time for addressing and solving the issues to reduce the huge financial impact of IR35.
Easy pickings for HMRC
The "Sham" contracts problem
Contractors can not declare themselves to be ‘self employed’ simply because they sign a contract with the client or an agency. HMRC have powers to look at the written contract between you and an agency and declare it a "sham" contract and claim that really you are a disguised employee and must pay considerably more tax.
When HMRC investigate you they will look at all of the working arrangements and form a notional contract and use this to judge your IR35 status.
The concept of a notional contract has always been part of IR35, but dismissing contracts as a sham have become the norm after the Autoclenz case.
HMRC discovers many contractors who have a signed agreement in place, which when checked, often shows that they are in fact an employee.
Working conditions are key for IR35
Your employment status and therefore your IR35 status depends on your contract and working arrangements as defined with IR35 case law.
Therefore, if you have not taken steps to avoid IR35 and ensure your working conditions ensure you are outside you could easily find yourself caught as a ‘disguised employee’ resulting in thousands of pounds of extra tax to pay.
How much extra tax will you pay under IR35?
You will need to pay extra taxes so that HMRC recover all the unpaid taxes that would have been paid by both yourself and your client as employer if they had employed you. The entire tax liability rests with you and your limited company.
HMRC will calculate how much income tax, national insurance, interest and penalties needs to be paid. They can go back 6 years to recover additional liabilities and if fraud is suspected they can go back 20 years.
If you are caught by IR35 and receive an extra tax bill, then you may only have 3-6 months to repay 6 years of additional liabilities. This can often be very difficult and seriously affect cash flow.
You can find out exactly how much IR35 would cost you using the IR35 Tax Calculator.
Given the magnitude of how much extra tax could be due it is essential for you to consider IR35 at these check points.
Checkpoint 1: Before starting your own business
An ideal time to consider IR35 is before you start your own business. Some aspects to consider:
- How many other contractors have started their business and are successfully working outside IR35?
- Have you considered the terms and conditions you will be able to work to?
- Do these terms and conditions make you caught by IR35 or not?
If you are considering setting up your own business, you need to consider the terms and conditions that you will be working to. If you want to be outside the scope of IR35, then your working conditions must be that of a self-employed contractor and not that of an employee.
Checkpoint 2: Before signing a new contract
It is of the up most importance to get any new contract professionally reviewed before you sign it together with your working arrangements.
You can provisionally check it yourself to determine if the contract passes IR35 but you should always use a professional.
If you sign the contract without getting it reviewed you will eliminate any opportunity to negotiate your contract for IR35 compliance.
Checkpoint 3: Get all existing and historic contracts checked
As a matter of urgency, to protect you from future HMRC action, you should have any current contract reviewed, together with any historic or future ones.
HMRC’s opinion under IR35 is that contractors should pay the same level of taxes as someone who is employed, and pay the firms employment taxes too, but get no benefits at all. It's entirely unfair, but that is the law.
Beat IR35 by acting now
It is important to have your contracts reviewed, so you can establish your status now and protect yourself and your business before any action from HMRC.
There are many strategies you can use to defeat IR35, but you need to be proactive. They all centre around two important concepts:
- Make sure your working arrangements do not fall foul of IR35 rules by actively managing the relationship to be one outside IR35
- Collect information and evidence during your contract that can later be used to quickly shut down any HMRC investigation
By getting a professional contract review you will be able to complete the above and be ready in case of investigation and also have peace of mind that you already have an excellent defence.