The Top 10 Questions IT Contractors are Asking About IR35
Despite IR35 legislation coming into force back in 2000, the Government estimates that only 10% of contractors are applying the IR35 rules properly in accordance with the regulations. It is believed that this is partly due to the complexities surrounding the legislation. Here are the top 10 questions IT contractors are asking about IR35, covering everything you need to know about tax for contractors...
1. How does IR35 tax work for IT contractors?
IR35 legislation provides tax benefits for those working under contracting agreements. However, it is also designed to crack down on ‘disguised employees’; those claiming benefits despite being an employee.
2. When does IR35 apply?
IR35 applies to anyone working under an employee contract. As an employee, the worker is employed directly by a business, receives benefits such as annual leave, and may work exclusively for the company.
3. When does IR35 not apply?
IR35 does not apply to anyone working under a contracting agreement. Contractors will not receive employee benefits, may work for multiple clients, and may form a limited company or partnership.
4. How do you know if you’re inside or outside the IR35?
Unfortunately, there is a very fine line between what’s considered to be inside IR35 and outside IR35. Contractors can use online tools or seek advice from experts to determine if they are compliant.
5. Does the reformed IR35 affect IT contractors?
Yes. The reformed IR35 is designed to crack down on IT and other contractors working under employee contracts but claiming IR35 tax benefits. It is vital for contractors to ensure they are tax compliant.
6. Do IR35 and HMRC interlink?
HMRC’s definition of self employment is what’s used to determine whether or not a contract falls within IR35. This is usually if you run your own business, sell products or services, and have multiple customers.
7. Is it possible to avoid IR35 when claiming expenses?
Expenses are a tricky area, as some expenses may be related to IR35 turnover, and others to non-IR35 turnover. Therefore, under IR35 guidelines, contractors can avoid IR35 when claiming some expenses.
8. What expenses can I claim when working inside IR35?
Expenses that can be claimed inside IR35 include business travel (and associated activities such as food and accommodation), pension payments, professional indemnity insurance, and ‘benefits in kind’.
9. Are there penalties in IR35?
You can be asked to repay tax and National Insurance for any period where you were deemed to be working within IR35 as a contractor. Penalties have already been dished out under the BBC tax scandal.
10. Is the IR35 Costly?
With a contract that falls inside IR35, you will pay more tax and National Insurance contributions. It is estimated that some contractors could lose up to 25% of their net income through additional payments.
Unfortunately, despite a thorough understanding of IR35 legislation, this can still be a challenging area for contractors. Client behaviours that are outside of your control — their history with IR35 compliance, their written contract, and their overall intention, for example — can all impact contractor compliance.
It is recommended that all IT contractors continually monitor and track their contractual duties, keeping a record, flagging aspects that may fall within IR35, and raising concerns with the client.