The Intermediaries legislation known as IR35 was introduced on 6th April 2000.
The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise –
For tax purposes, be regarded as an employee of the client; and
For NICs purposes, be regarded as employed in employed earner’s employment by the client.
Many Freelance Contractors have some assignments within IR35 and some outside, you can ask HMRC for their opinion.
If you would like HMRC’s opinion on a particular engagement you should send your contract(s) to:
IR35 Customer Service Unit
HMRC
Ground Floor North
Princess House
Cliftonville Road
Northampton
NN1 5AE
Tel No: 0845 303 3535 (Opening hours 8.30am to 4.30pm, Monday to Friday. Closed weekends and bank holidays) Fax No: 0845 302 3535
If your contract is within IR35 its not the end of the world, the chances are that you will still pay less tax than a direct employee, to calculate the tax you have to work through 8 stages of calculation, here is a summary:
How much were you paid? deduct 5% for business costs
Add any other payments/non cash benefits
Deduct business expenses – travel, meals, accommodation
Deduct capital allowances relevant to the work done
Deduct pension contributions made by your company
Deduct any NIC paid by your company on your salary and benefits
Deduct any salary or benefits already paid and taxed
If the answer is zero or negative then there is no deemed payment, if the answer is positive you do have a deemed payment which will be taxable
HMRC have a spreadsheet you can download which has further details.
Demand from UK businesses for contract workers is continuing to rise in 2013, which could be good news for freelancers looking to get their foot in the door on a lucrative new project.
Why is it attractive to use Freelancers?
Skill is more important than location in many business sectors – we live in world where internet can allow you to work with anyone at anytime, you can now track down the best person to work with even if they live thousands of miles away
Lower fixed costs – Using Freelancers will lower your fixed costs (in similar way to Zero Hours Contracts), you employ them for a specific project and only pay for what you need so there isn’t any surplus capacity
Tax advantages – Freelancers run their own business and that means they pay less tax than employees. Employers save tax too, such as Employers NI.
Competitive Advantage – You can put together a team for a contract rather than finding contracts that fit your workforce, this means you can hire the best.
110% Commitment – A Freelancers success and future work depends on them performing to the highest level on every contract, failure is not an option for a successful contractor.
So is it a mission impossible for salaried employees to make the transition to Freelancers
Dragonfly Consulting was a one man consultancy business, the one man being Mr John Bessell and his client was the AA (Automobile Association). It was landmark case in IR35 which was concluded in 2008 when HMRC won the case and claimed £99,000 in unpaid taxes and National Insurance.
First lets get Mike and Jeff to explain the basics of IR35 and employment status….
The key points being:
Personal Service and Substitution
Control
Mutual Obligation
So let’s pick out the key points in the Judgement:
1. Personal service / substitution.
Mr Bessell was named as the Consultant in two of the lower level agreements; however the fact that his name was omitted from the other lower level agreements did not undermine the requirement for his personal service. Henderson J found that Dragonfly was a one-man company, whose raison d’etre was to supply Mr Bessell’s services – therefore it was obvious that the intention of both parties was that it would be Mr Bessell who would provide the services.
The existence of a clause in the lower level agreement demonstrating that a substitute could only be used where the AA had expressly agreed it, and the oral evidence given by AA’s representatives regarding substitution, resulted in Henderson J concluding that the findings of fact were unassailable – amply justifying the Special Commissioners conclusion that each notional contract would have been for the services of Mr Bessell, and that a substitute could be used only if the AA had firstly given notice that a particular substitute was acceptable.
2. Control
Henderson J agreed with the Special Commissioner that a schedule supporting the first lower level agreement demonstrated that the consultant provided by Dragonfly was to act under the direct supervision and control of the AA.
3. Intention of the parties
Henderson J summarised the position, acknowledging that statements by the parties disavowing any intention to create a relationship of employment cannot prevail over the true legal effect of the agreement between them.
It was accepted that, in a borderline case, a statement of the parties intention may be taken into account and may help to tip the balance one way or the other, however in the majority of cases such statements will be of little, if any, assistance in characterising the relationship between the parties.
whether the engagement was one of service or for services – therefore the hypothetical contract would not have included a statement of the intention of the parties. Even if it was found such a clause were to be included in the hypothetical contract, this could not by itself result in reach the opposite conclusion about Mr Bessell’s notional status as an employee.
4. Worker status.
The appellant contended that the Special Commissioner failed to consider a third intermediate category – that of ‘worker’.
Henderson J confirmed the general law of employment does not recognise a third intermediate category between employment and self-employment; therefore there was no reason why the Special Commissioner should have considered any other category. In the context of IR35 the only distinction to be made is whether the notional contract is one of service or not – and the Special Commissioner clearly had that in mind.
Henderson J concluded by stating that for the reasons given in his judgement the conclusion that Mr Bessell fell on the employment side of the line is unassailable.
The lessons we can learn from this are:
The contractual paperwork must be correct at every stage
Paperwork on its own is not enough and commercial reality may take precedence
Demand from UK businesses for contract workers is continuing to rise in 2013, which could be good news for freelancers looking to get their foot in the door on a lucrative new project.
Despite the economic downturn, companies are still on the lookout for talented new employees, with demand surging after a slowdown in April. The findings pointed to more vacancies in the private sector than public sector roles.
So why would you want to be a Freelancer.
Pay rates – generally contractors are paid considerably more than employees
Flexibility – you are your won boss but the downside is that you have to find work
“Operating through a limited company as opposed to an employee brings significant financial benefits. By taking a small salary and high dividends you pay far less National Insurance, saving around 26%. There are obviously associated costs involved in running your own company, such as accountancy fees and insurance, but the overall ‘take home’ pay will still almost certainly exceed that of an employee.
But with the benefits there also comes risks. The IR35 legislation could affect any contractors working through limited companies and it’s vital that you take steps to ensure you are compliant. Contracting is also far less stable than permanent employment; you have been engaged as a temporary resource and your client can terminate the agreement at any stage. There is also the issue of illness; as a contractor you won’t receive any sick pay from your client, so any days not worked will hit your finances.”
But on a final note makesure you have the right equipment as explained in this sketch
