| Contractors and freelancers who choose not to | | | | the contractor did not have an intermediary like |
| be permanent employees and work flexibly for | | | | their limited company between them and the |
| many clients have been targeted by UK tax | | | | client, they would be a permanent employee and |
| legislation called IR35. IR35 tax legislation is | | | | should be taxed as such. This is why IR35 is also |
| designed to tax as if they were 'disguised | | | | called the 'Intermediary's Legislation'. |
| employees' workers providing their skilled and | | | | HMRC uses key 'tests of employment' to check if |
| predominantly knowledge-based services to clients | | | | a contractor is a disguised employee, including: |
| via their own limited company. IR35 can result in | | | | - Whether the contractor is controlled, or told |
| these workers losing up to 25% of their normal | | | | how to work, by their end user client |
| take-home pay in extra taxation. | | | | - The ability of the contractor to use a substitute |
| Unfortunately, IR35 was poorly thought through | | | | on the contract - Mutuality of obligation, or 'MOO' |
| and subsequent tax tribunals and court cases | | | | - where an employer is obliged to provide work |
| have made things so complex that prudent | | | | and an employee is obliged to do it. |
| contractors pay professional advisers to ensure | | | | Generally, if a contractor fails one of these tests, |
| they are not caught by IR35. | | | | a tribunal or court will find that they are outside |
| Her Majesty's Revenue and Customs (HMRC) | | | | of IR35 and so do not have to pay extra tax as |
| mounts IR35 investigations into many contractors' | | | | an employee. Unfortunately, though, tests of |
| tax affairs every year, and is able to investigate | | | | employment are rarely straightforward. So |
| contractors' tax returns and working practices up | | | | contractors can undergo long periods of stress |
| to six years in arrears. And many contractors end | | | | during the course of an IR35 investigation, and still |
| up in IR35 tax tribunals or court cases because | | | | fall foul of IR35 legislation due to technicalities. |
| they dispute having to pay the extra tax | | | | There are easy actions contractors should employ |
| demanded. | | | | to reduce the chances of them being found within |
| When deciding on whether or not a contractor is | | | | IR35, eg to invest in tax investigation insurance, |
| inside IR35 and therefore must pay extra tax, | | | | to get contracts checked by an expert, and to |
| HMRC inspectors - and later tax tribunals and | | | | get clients to confirm the contractor's working |
| courts - look at three key areas: | | | | arrangements. |
| - The written contract between the contractor | | | | Contractor organisations have tried to abolish IR35 |
| and the agency and end-user client | | | | for many years, but it is likely that the legislation, |
| - The contractor's business as a whole | | | | or something very similar to IR35, will remain on |
| - The actual working relationship between the | | | | the statue books for the foreseeable future. |
| contractor and their client. | | | | Therefore, contractors should always ensure they |
| What tax inspectors want to prove is that the | | | | manage their contracting careers so that they |
| contractor is really a 'disguised employee', and if | | | | never fall foul of IR35. |