Avoid Falling Foul of IR35 by paying attention to the elements of the legislation involving financial risk and payment control.
Off payroll working through an intermediary, or intermediaries legislation (known as IR35 and also off-payroll working in the public sector) is tax legislation related to anti-avoidance rules that are designed to catch out disguised employment or disguised remuneration. It was put in place to ensure that no one gains a tax advantage, that anyone who is in factemployed pays tax via PAYE and employers pay NI for employees too.
To ensure you are deemed a self-employed sole trader or limited company contractor you must make sure you follow to the letter the rules related to IR35. You must make sure that both your working practices and contracts fall outside IR35 legislation.
Five minutes now to take the IR35 Test could save you a lot of hassle. Find it here.
If either your working practices or your contract is deemed to fall inside IR35 then this may mean that your work and your income is treated as a relationship of employment and mean that any payment is taxed at source. Getting caught within IR35 can mean paying up to 25% more tax because you will not be able to pay yourself a salary and take dividends, but instead will be required to draw all of your income as salary and pay tax like an employee.
Financial riskin relation to the contractor
If you are caught inside IR35 and deemed to be an employee,all of your income will be taxed under PAYE at source, but a self-employed or limited company contractor will be much better protected if s/he ensures that the business is taking a financial risk. To show your business is taking financial risk you must demonstrate several things.
All your actions in business must indicate you’re operating as a business. Taking financial risk is a major part of safeguarding against falling foul of IR35. You can estimate your risk using the IR35 risk assessment test, which mirrors the benchmark against you will be assessed by the tax authorities should you be deemed to fall inside IR35. Read more about 2017’s reforms to IR35.
Rectifying a job
Rectifying problems with a job at the expense of your business is a highly significant point.If your business is responsible for putting right any mistakes made by you or your intermediary, then you should have evidence to support your claim, including the following:
- A contractual clause to say that your business is responsible for putting right any errors in the contracted work;
- Mention in the contract that, should something go wrong with the job,who is responsible, who will fix it, and at whose expense;
- Costings in relation to the cost of putting right mistakes made by your business.
Financial risk in relation to client
If a client is unable to pay for work your business carried out and this is over 10% of the annual turnover of your business, it is significant, because it is a strong indication of being in business on your own account. Evidence to support this claim would be:
- Accounts showing write-offs
- Correspondence between client and business about the job and about payment
- Evidence of legal action for recovery
Payment control and invoicing
Financial risk can be proven in the performance of carrying out the work, as above, but also your status will be made clearer by how you request and receive payment for the services or goods provided.Invoicing for the job when the job is done or detailing staged payments in your contract is crucial; your invoice history will also validate your claim of operating as a business.
A self-employed or limited company contractor running a business will incur financial risk as a matter of course if, say, they have to await payment until the end of the job or only get paid 50% until the job is complete. A business might be incurring expenses on things like marketing, tools, equipment, and travel/subsistence as well, so expenses records are important and you should keep them in good order.
The fact that a self-employed contractor or business chooses the rates they charge or agrees the rate with the client for the job beforehand, means that there is another opportunity both for risk and to prove bona-fide self-employed status: e.g. what if a price given for a job does not cover the time the job takes, or what if the contractor needs to bring in an additional worker to meet the deadline who has not been initially costed into the job?
All of this is in stark contrast to employment, where the employer is ultimately responsible for incurring costs and receiving payment from the client or customer. This is why the elements of IR35 – off payroll working through an intermediary or intermediaries legislation (also off-payroll working in the public sector) – where it involves financial risk and payment control carries significant weight within the legislation.
Don’t leave your status to luck, follow the rules related to IR35 in 2018, get your contracts checked, and make sure you know the rules.Read the IR35 checklist here. And take the IR35 Test today to be sure your contractor status is secure.