IR35 is a comprehensive reform of off-payroll working rules that may force many contractors to consider no longer operating as a limited company.
Freelancers and contractors often set themselves up as limited companies to gain significant tax advantages – even if they only have one client.
But the government is aiming to clamp down on the practice using legislation called IR35. It already affects the public sector but will come into force for the private sector in April 2020.
IR35 aims to stop contractors with only one client operating as a limited company and instead designate them as employees.
How can contractors act on IR35?
Crucially, if contractors wish to remain outside of IR35, they must show they are a business in their own right, rather than simply an employee by another name.
Here are some ways of achieving this:
1. Work with more than one client. It might sound obvious, but the most effective way of showing that you are running a business is to take on work outside of your single client. If your time is split between multiple clients, it’s much harder for HMRC to claim you’re an employee of any of them.
2. Create an office environment. Even if it is in your own home, an office is at least a signal that you have a base away from your contracted place of work. Think beyond a desk in a spare bedroom – marketing materials, business cards, and a website that lists your products and services will all help.
3. Show that your working conditions and benefits are far different from employees – such as hours, pension, and associated benefits.
4. Give your company a name that shows it’s a business – don’t simply name it Joe Bloggs Limited.
5. IR35 seeks to identify contractors who are effectively employees. Make sure your company is simply providing the service it states on your invoices.
6. Train, learn, and attend conferences. If you’re making an obvious effort to invest in your professional development to remain qualified or make your business more attractive, it demonstrates you’re a contractor rather than an employee. Staff will receive training as part of their employment status – you won’t.
7. Take expert advice. Investing in advice means you’re far more likely to preserve your status as a contractor. On the other hand, building evidence that you are not an employee may mean doing more than following the guidance on this page.
For help and advice, contact the Future Strategy team today.