How to survive the challenges of IR35

IR35 is a piece of tax legislation that can considerably impact the way you do business. If you are a contractor working within the UK, you need to know how to deal with IR35. 

Find out here whether IR35 affects you and how you can help your business survive the challenges IR35 creates, including:

• The changes to IR35
• Finding out if IR35 applies to you
• How to deal with IR35

IR35 stops companies from using contractors as ‘disguised employees’. Using contractors in this way means the contractor does not need to pay income tax. It also means the hiring company doesn’t need to provide any benefits that a typical employee is entitled to. 

IR35 applies to contractors working for limited companies. This means that sole traders are not affected by IR35 when they hire contractors. The legislation would still apply to a contractor registered as a sole trader themselves, though. 

The best way to check if IR35 applies to you is to use HMRC’s online employment status tool. It’s wise to check this whenever you enter into a contract with a new client. Otherwise, you may have to deal with a government investigation. 

Two significant changes to IR35 came into force in April 2021. The first was the extension of the law into the private sector. Initially, it only applied to public sector organisations, meaning businesses controlled by the government. Now businesses owned by private individuals need to follow IR35 rules too.

The second important change is that clients decide if a contractor falls inside or outside IR35, not the contractor. It’s this second change that causes the most problems.

Since client companies are now responsible for deciding if their contractors fall inside or outside IR35, they are also liable if they make a mistake. Any mistake is punishable by a fine, as the client will need to pay back the tax that the contractor should have been paying. 

IR35 is very complicated, so many companies are afraid of making wrong decisions. They worry about mistakenly placing contractors outside IR35 when they should be outside and vice versa. Unfortunately, this has led to many of them choosing not to employ contractors at all. 

Several corporations that rely heavily on contractors (including BP, Three and Zurich) are massively changing how they hire contractors. Some are ceasing to hire contractors at all. In response, many contractors have seen no choice but to leave self-employment. One survey found that 35% of contractors are now in permanent positions or unemployed since the IR35 changes arrived. 

Even when they manage to find work, contractors who are ‘inside’ IR35 — which means they need to be classed as employees — suffer from much higher taxes. As employees, they need to pay income tax. Despite this, they still aren’t entitled to any employee benefits without a specific contract from the client.

IPSE is a membership organisation that supports self-employed individuals that might be affected by IR35. They have a ton of useful information on their website regarding IR35. You can also contact them directly if you have further questions.

One of the most valuable services IPSE offers is legal advice and representation during IR35 investigations. HMRC may launch an IR35 investigation into your company to find out if you are working within IR35 rules. This can be very expensive and time-consuming to deal with. 

If you’re an IPSE member, though, you’ll be able to avoid the cost of hiring a tax law specialist. On top of that, IPSE will deal with any HMRC correspondence you receive during the investigation, saving you time. Although you’ll need to pay for an IPSE subscription to receive this benefit, it’s enormously helpful.

If HMRC begins an investigation into your company, you’ll must provide evidence that you genuinely are a freelancer. This will help you avoid having to pay income tax and (if you’ve been working outside IR35 for a while) any accusations of tax evasion.

There are many documents you can use as evidence, but correspondence from your client is usually a good choice. Anything from emails to contracts work, but make sure of two things first:

• The correspondence explicitly states you’re not under the control of a manager within the client company.
• The correspondence explicitly states that you’re only working there to provide a specific service. 

The investigation is mainly looking to prove that you’re not working as an employee for the client company. This means developing your business helps you stay outside IR35. By having a solid marketing campaign or renting your own office space, you’ll add to your image of being a full-fledged business instead of a disguised employee. 

One of the simplest and most effective ways of dealing with IR35 is to steer clear of HMRC investigations. Even if you’re doing everything by the book, an IR35 investigation can cause significant disruption to your business, so avoiding the government’s attention is a good idea.

The best method for staying under the radar is to follow tax law to the letter. Fill in your Self-Assessment tax return on time and without any errors, and make sure all your accounts are in order (especially any documents relating to income tax). If necessary, hire an accountant to double-check your work. Mistakes and late documents will draw attention from HMRC, which might lead to an investigation.

Even without IR35, paying taxes can be a complex subject for self-employed individuals. This is one of the reasons why over 40,000 business owners trust Countingup to make their bookkeeping easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

Find out more here.