If you are a self-employed contractor, or your company employs the work of contractors, you will likely be aware of IR35, what it means for your business and its tax implications. This article will look at how long contractors can work for the same company, and what it means in terms of the tax laws in the UK, by looking at the following areas:
- How long can a contractor work for the same company without falling foul of IR35?
- What is IR35?
- What is ‘inside’ IR35?
- What is ‘outside’ IR35?
- How does IR35 apply to contractors that work for a company long-term?
How long can a contractor work for the same company without falling foul of IR35?
Simply put, there is no time limit on how long you can work for one company as a contractor.
When working for a company long-term it is important to take into consideration what your role there is and how it could be perceived from a tax perspective. IR35 is a tax law that regulates contractors, and businesses who employ contractors, to ensure there is no tax avoidance on either party’s side. And working long-term for a business could put you under HMRC’s microscope to ensure you operate within the boundaries of contractor work.
Ultimately, what dictates if you are legally considered a contractor by HMRC, is your activities while working for the business. The length of time of your contract with them may be looked at to ensure IR35 compliance, but it’s what you do for the company that matters legally.
What is IR35?
IR35 refers to the difference between an employee and a contractor in HMRC’s eyes. An employee is an individual employed by a business, they will answer to a manager in the company and are employed for a salary, regardless of how much work there is to do.
A contractor, however, invoices the company for their fees, for a temporary period of work (though this can be long-term), or will have a contract that can be extended and renewed. They will cease working for the company when the work is complete or there is not enough work available to support having them there.
So IR35 is a piece of tax-avoidance legislation to prevent both businesses and contractors from abusing loopholes. It is more tax-efficient for a company to employ a contractor because they do not have to pay National Insurance for the individual, as well as saving money on other benefits that an employee would enjoy, such as:
- Paid holiday
- Pension contributions
- Sick leave
IR35 arose because companies were hiring contractors through limited companies (many contractors are self-employed by their own limited company) and the contractor’s duties for the company were more or less the same as an employee’s – and it was saving both the contractor and the business tax. This relationship of a contractor acting as an employee, but not being called one, is called ‘a disguised employee’. Disguised employees will typically work longer contracts, as they are basically full-time employees in all but name.
So the IR35 law protects contractors and companies against the other party exploiting the tax system, as well as preventing HMRC from losing tax they are in fact due. To ensure compliance, an investigator is appointed by HMRC to look at the relationship between the contractor and the company. The inspector will determine whether contractors fall ‘inside’ IR35 (employee status) or ‘outside’ (contractor status).
What is ‘inside’ IR35?
If a contractor falls inside IR35 they are treated just as an employee would be, but without the tax benefits. If found to be inside IR35 then the company will have to start paying National Insurance and tax for the contractor (now an employee) or end their contract.
What is ‘outside’ IR35?
Contractors that fall outside of IR35 are paid as a contractor, without the benefits of employment by the company. They will invoice the business but will take their salary from their limited company, or from a recruitment agency/third party that manages contractors. These contractors will continue to manage their own taxes.
How does IR35 apply to contractors that work for a company long-term?
If you’re working long-term with a company directly (not through a contractors agency) then it’s important to understand this legislation and stay on the right side of HMRC, as you don’t want to be mistaken for manipulating the tax system.
As mentioned, it’s your activities for the company that differentiates you from their employees, so if your tax status is in question, there are a few ways you can prove your activities are that of a contractor and not an employee of the firm:
- Highlight that you don’t have minimum hours or that you set your own hours.
- Show that you can say yes or no to carry out certain work, unlike an employee who doesn’t have a choice.
- Prove you have your own business insurance.
- Prove that you buy your own equipment in order to work.
- Show you have multiple clients at once, by showing your invoices.
- Keep a record of any investment in your own professional development (usually, businesses will pay for their own employees to remain certified).
- You don’t have other responsibilities that an employee would, such as reporting to a line manager or wearing a uniform.
- Your limited company name does not contain your own name. This is a way people have ‘disguised’ themselves as contractors before, so it is best to have a separate professional business name.
- Keep any emails that show that you have different rules or working conditions than the employees at the company.
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