Why is it integral for Contractors to seek IR35 advice from Contractor Accountants?

Contractors must seriously consider the intermediaries legislation, identified as IR35, which is actually a directive that aims to solve tax avoidance and will ascertain payment of the real sum of PAYE (pay as you earn) tax and National Insurance Contributions (NICs). Seeking advice on their IR35 status will shield contractors from any type of penalties, back tax payments and interest. The IR35 law is policed by HMRC (HM Revenue & Customs). Seeking the aid of IR35 accountants will facilitate the assessment of contracts and business practices to observe or stay away from the scope of IR35.

Key things that contractors need to learn about with regard to IR35.

1) A large lumps sum payment of retrospective PAYE and National Insurance

This is one good reason why contractors should seek the advice of an IR35 accountant. HMRC is responsible for applying IR35 protocols so that contractors who fall withi
IR35 (also described as “failed an IR35 status test”) should be paying the precise value of PAYE taxes and National Insurance Contributions on time. Should they be pulled up for an IR35 inspection, contractors who categorically fall inside IR35 and still contract as though they fall outside of IR35 face demands from HMRC for large lump sum payouts of taxes going back potentially to cover 6 tax years.

2) Review of their Contract for Services

The Contract for Services is one key point where HMRC will look for compliance of IR35. Needless to suggest that previous to signing the contract, an assessment by experts should be undertaken to guarantee compliance to the legislation or, ideally, to establish that your written contract is outside the realm of IR35.

Although HMRC can examine a large number of issues when investigating a contractor for IR35 compliance, there are four key items one can examine in the contract itself. The first is the parties engaged. The contract should be involving a limited company and the client or end user. For obvious reasons, if the parties to the contract are the individual themselves and the end user then it is a permanent labor contract.

The second thing to consider is the inclusion of a substitution clause. A substitution clause clearly aims to affirm that should the person representing the limited company is unable to perform the work for whatever grounds, then the right to substitute that individual with a suitably skilled replacement sit with the limited company, and not the client or end user. This is a strong point in favour of the contractor should an IR35 case be filed to the courts.

A 3rd consideration is the signatures on the contract itself. As noted before, the limited company contract shouldn’t be between an individual and the client or end user and the signatures as well as labels of the signatures should be on behalf of the limited company and not the named individual themselves.

Finally, there should be no clauses in the contract that incline towards, or signify that, the contractor is an employee of the client or end user, because they simply are not. For instance, any clauses suggesting that the limited company contractor is given holiday pay, leans strongly towards IR35 and is unfavorable for the contractor. Also, any provisions for sick pay, company pensions or benefits are not in the genuine spirit of freelance contracting and should therefore be entirely avoided. The specific exclusion of these items within the contract for services indicates that the contractor is certainly independent and takes his or her own financial risk by running their own business.

3) Safeguarding Best Practices

Most importantly, seeking IR35 accountants’ guidance to lay out best practices and to demonstrate true ‘Badges of Business’, particularly ensuring that all tax documents are legitimate, complete and filed on time to HMRC and Companies House will permit contractors to continue to utilize their limited company to supply their services to different clients with confidence that should an IR35 evaluation be brought by HMRC, they can be comfortable they will pass compliancy checks with flying colors.

Contracting outside the scope of IR35 entails better financial gains for those owners of their own limited companies, as well at the taking the same accompanying risks of operating their own business. However, failing IR35 when one is aware they should be contracting within the scope of IR35 can lead to large penalties and interest. That is why contractors should be diligent when planning and managing their risk and exposure to the IR35 intermediaries legislation, which can be cushioned and mitigated by engaging knowledgeable and experienced IR35 accountants.