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Tax talk - What type of worker are you?

March 30, 2018

 

Employed or off payroll worker, contractor or disguised employee? Do you know what you are?

 

IR35 is a set of rules that affect your tax and National Insurance contributions if you’re contracted to work for a client through an intermediary. The employed vs self employed has always been a grey area and now HMRC have thrown this legislation into the mix to make matters more complicated for contractors and freelancers.

 

Let’s run through an example. There is a small business which has been set up as a Limited company. The Director is the only worker for this company and is contracted to work for a larger firm. Provided that the Director did not use the Limited business for the contracted work then, under normal circumstances, he/she would be seen as a regular employee by the larger firm.

 

The Director of the Limited company then works for a client through their own intermediary and so becomes involved in off-payroll. This now poses a new issue as off-payroll workers are required to pay Income Tax and National Insurance contributions in a different way to which an employee is required to. One reason for this is that the rates are less and this is an obvious issue for HMRC.

 

When considering whether to accept a new contract, the first and most important factor is to establish whether you are 'employed' or 'self employed' in accordance with HMRC guidelines. IR35 affects all contractors who do not meet HMRC's definition of 'self employment'.

 

The IR35 rules will result in increased tax and N.I. liability and will prevent contractor companies from retaining their profits for future business growth. With this in mind, it may be the time to look into ways of diversifying your business so that you can release yourself from the clutches of IR35 and avoid the “self employed” category.

 

With the thought of facing challenges like these, it does raise the question “why be in business in the first place”. The be all and end all of any business is to make money, and of course the business should make money, but the issue here is that it is at HMRC’s expense.

 

Although adhering to the rules and paying particular consideration to your employment status in the eyes of the HMRC can be tedious, it is imperative. Why? Because there are interest and penalties charges for not following off-payroll working rules and if it is found that the rules have been deliberately ignored then the penalties can be much more severe.

 

So what steps should you take to prepare and strengthen your position should the HMRC come knocking at your door? We recommend that you take the time to ensure you have the following in place:

  • A cast iron contract that covers:

    • How and when the work will be done

    • Procedure on the substitution of workers

    • Explanation of the financial risks to each party

    • Details of the ownership of the equipment that will be used

    • Details of the premises

    • Any non employee benefits

    • Detailed intentions of each party

    • Procedure for termination

    • Procedure for breach of contract

  • Business liability insurance

  • Full company branding, including;

    • Uniform

    • Stationary

    • Vehicle signage

  • The business entity is registered as a Limited Company, ensuring that you are on the payroll for your own business

  • Clear documentation of invoices and fees

Follow these steps and you will be in a good position for a visit from the HMRC. However, should you want further help or information on this matter, please do not hesitate to contact us. We would be happy to help.

 

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