Are you considering taking a role inside IR35? Most contractors would prefer to take roles outside of IR35 to minimise their tax liabilities but even if you work with an accountant this can still be a minefield and if you make errors the tax bill can be expensive!
Taking a role inside IR35 will equal less take home pay, you can use the HMRC tool to check whether if your role is in or out. If working in the public sector this is determined by the employer if successful the rules might be extended to the private sector which is to be determined!
Below I have highlighted some of the key questions that help determine the status, but proper advice should be sought.
|Defined task – if you are engaged simply as a “helping hand” then this points towards employment. By contrast, if you are engaged to carry out a specific task, at the end of which the engagement ends, then this points to self-employment.|
|Control – if you are subject to control as to how your work is carried out then this points towards employment – if you are merely measured against agreed outcomes/deliverables and can work in your own manner then this points towards self-employment.|
|The method of payment – if you are paid by the hour/day/week then that points to employment – being paid for a project or task points towards self-employment.|
|Working hours – if you are contracted to work set hours then that points to employment – if you are contracted by reference to outcomes/deliverables then that points to self-employment.|
|Simultaneous contracts – if you work only for one client then that points towards employment – if you work for a number of clients, and even better if they overlap, then this points towards self-employment.|
|Risk – little or no commercial risk taken indicates employment – risk indicates self-employment. Risks could be responsibility for rectification of errors and mistakes or financial risk of a project overrun.|
|Responsibility for losses as well as profits – if the contractor is isolated against losses then that points towards employment – if there is a risk of losses then that points towards self-employment. Of course with a labour only service, making a loss is difficult, but the general flavour of the contract must be for risk to sit with the contractor.|
|Provision of equipment – if the client’s equipment is used then that points towards employment – if it’s -the contractors then that points towards self-employment. Obviously, it is not practical for a one man company to provide large items, but PCs for working at home, laptop computers, basic home office equipment, hand tools, etc, point towards self-employment.|
|Business structure – do you have a business structure behind you, eg staff, office premises, a significant investment in equipment.|
|Freedom to delegate and substitute – contracts of employment do not have a right of delegation or substitute. Where this right is included in the contract then it is a strong indicator of self-employment. A Court of Appeal judgement, Express & Echo Publications v Tanton, held that where a contract allowed services to be carried out by someone other than the contractor then it was a contract for services (i.e. self-employment) rather than a contract of service (i.e. employment); this applies even if the engager has a right of veto on the substitute.|
|Bearing cost of correcting defective work and errors – if you do not bear the risks of correcting defective work and errors then this indicates employment – if you do bear this risk, eg by having to carry out remedial work in unpaid time or as part of a fixed price/outcome contract, then that is an indicator of self-employment.|
|Freedom to choose where and when you work – being tied to the client’s site indicates employment – the ability to work at home indicates self-employment.|
|Integration – if you are integrated into a client’s organisation then that indicates employment – no integration indicates self-employment. Integration in this context could be work as part of a team, inclusion by name on the employer’s stationery or promotional literature, being on-call rotas.|
|Mutuality – mutuality of obligations points towards employment, i.e. the client is obliged to offer you work and you are obliged to accept it – non-mutuality points towards self-employment.|
Most interim assignments will be caught unless it’s a project or programme with defined end date and complete autonomy.
Is it still worth doing interim work if caught? It depends on your rate if you decide to go back to a permanent role you will get additional benefits like sick leave, employee benefits and pension contribution but you will need to be a high earner for the salary equivalent to be on par with your contractor pay, even if the rates are reduced.
The main thing contractors can do to minimise their tax liability is to pay as much as they can into their pension. The allowance changes each year but in 2017 this is £40k and can be offset against your gross salary/fee. Note lower tax payers should salary sacrifice a maximum of 32k and higher taxpayers can claim the additional allowance via their self-assessment tax.
If caught you need to decide how you want to be paid.
PAYE via Agency- less administration and everything you earn yours to keep. You are not an employee, therefore, salary sacrifice will not apply.
Umbrella- similar to PAYE but you choose an independent third-party company to give you a contract of employment you will be tied to the Umbrella companies pension provider, you can keep the same umbrella for different assignments. There is an additional cost for paying the payroll company normally charged weekly. Other than filling in your time sheets there is no further administration. If you decide to move the Umbrella pension to your own private pension company you need to check if it will be accepted and whether if there any penalties applicable.
Limited – Inside IR35 you continue to have all the paperwork that you would have outside IR35 with no option to claim expenses or pay via low salary/ dividend structure. Accountancy fees etc still need to be paid. However, there is flexibility to choose your own pension provider and if you’re lucky enough to get assignments outside IR35 you can go back and forth easier with minimum disruption. You won’t have to pay corporation tax so double taxation is avoided.
Going inside IR35 with the pension allowance used to maximum capacity is your best bet if you have savings and can survive on a lower salary. This option will still give you a decent salary equivalent to someone permanent between 45-55k + depending on your day rate and allow you to put money away for retirement. Income you retain is disposable with a small amount put away into a savings account for a rainy day.
Note if you are using the Limited company model you need to pay yourself a higher salary if money is via PAYE as you can only get relief up to your salary amount. You can make company contributions but this is at the discretion of your local tax office.
Lastly, seek independent financial advice! Typical fees are 1% of funds