What is IR35?

Essentially, IR35 affects all contractors who do not meet the Inland Revenue's definition of 'self employment'.

The rules will result in an increased tax and N.I liability and will prevent contractor companies from retaining profits to grow their business in the future.

Those contractors who fall under the IR35 rules will be liable to Schedule E taxation and National Insurance (N.I), following deductions for expenses. Income will be in the form of a 'deemed payment', following these deductions.Contractor Companies may have a mixture of IR35 and non-IR35 turnover, in which case income and reward associated with unregulated contracts will escape these rules.

Normal Section 198 expenses may still be claimed. In addition, there is a provision for other intermediary expenses of 5% of a contractor's turnover.

The following expenses can therefore be claimed in addition to the 5% allowance:

• Pension payments - either personal or executive schemes
  
  
• Business travel - incurred in the course of business duties
  
  
• Subsistence - accomodation, meals when away from home
  
  
• Professional Indemnity cover
  
  
• Benefits in kind - e.g. private medical insurance

It should be noted that training expenses will not form part of this allowance. We would advise contractors to seek legal advice to determine their position under the rules. If you are caught by IR35, you may be able to change the way you work (working practices) and use an IR35 'friendly' contract to help bypass the legislation.

Are you 'Self Employed'?

The first and most important point is to establish whether you are 'employed' or 'self employed' under the Inland Revenue definition (pdf) of the terms. The ambiguity of the 'employment status' guidelines does not help the matter.

The Inland Revenue state that they will take an overall view of a contractor's position to determine whether they will be deemed 'employed' under the new rules, therefore any amended contracts should also reflect your working practices.

It is clearly in all contractors interests to be viewed as 'self employed', or at least for part of your income to be IR35-free. If you are able to diversify your business interests, or change your working practices in order to satisfy more of the pointers to 'self employment', your position will be strengthened.

In essence, there are several ways to beat IR35:

• Show that you are 'self employed', as per the Inland Revenue definition of the term (see above). This is the ideal option. This will typically require an 'IR35 friendly' contract, with working practices which match those stated in the contract.
  
  
• Contract Overseas - leave for sunnier climbs and get taxed on a fairer basis elsewhere. Of course, there are many other reasons why contracting overseas may also appeal (better climate, less polution, cheaper accomodation costs, etc). Whatever your reason for making the move, you should be aware that overseas tax laws are equally or more complex than those in the UK, so you should consult a tax specialist before you leave, otherwise you may not necessarily be any better off financially.
  
  
• Go Permanent - contracting is a way of life - if you enjoy it, you should go for one of the previous options before thinking about going permanent. On the other hand, this may appeal to some contractors who find the uncertainty over IR35 unbearable and prefer to feel more secure about their future.
  
  
• Do Nothing - many contractors have not addressed the IR35 issue - either hoping that the legislation will be revoked, or believing that it will not apply to them. We would advise against this approach. Although we all hope that this or a future government will withdraw this legislation, IR35 is now law, and all contractors caught by the rules should make arrangements to meet the increased financial burden.

For more information and advice, follow these links: