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There are many benefits to becoming a freelance contractor, from flexible working hours to creating a healthier work-life balance. Of course, there are some challenges, too. One of the biggest headaches is around tax, with the fabled IR35 legislation being a particular worry.

But what are the IR35 rules for limited companies, and how do you stay inside the law? This article will give you the basics, and we’ll link to an in-depth guide at the end, too.

What exactly is IR35?
IR35 is a piece of legislation that stipulates the amount of tax and insurance you pay on a given contract.

It was put in place to stop something called disguised employment. This is where people quit their job, only to return immediately as a limited company contractor in the same role.

As you can imagine, working under disguised employment offers a lot of tax breaks for the individual, with very little risk—you’re still essentially employed, but now you get all the tax breaks of a limited company.

The government caught wind of this sneaky practice in the late 1990s, so introduced IR35 in 2000 to control it.

How do I know if I fall inside IR35 rules?
In the eyes of the government, there are three key elements that will determine an IR35 limited company contractor. These are known as control, mutuality of obligation, and substitution.

Control looks (unsurprisingly) at the amount of control the client has over the contractor. Is the client dictating strict working hours, or demanding that the contractor carry out work outside their remit? This may be an IR35 situation.

Mutuality of obligation is slightly more complicated. In normal employment, the employer is obligated to assign paid work to the employee, and the employee is obligated to carry out that work. Basically, you do exactly what you’re told to do by your employer in order to get paid. As a contractor, things are slightly different. You’ll be given a specific task or project, and your only obligation is to complete it. Any work not related to the project is not the contractor’s responsibility.

Substitution is another tricky concept. A limited company outside IR35 should be able to demonstrate that any qualified person could carry out the contracted role with the client. Basically, could you send a substitute in your place to carry out a contract? If not, it might be an IR35 situation.

There are, of course, other variables that can contribute to a contract coming under IR35. But the above three factors are key, and will be a strong indicator of where your contract falls under the legislation.

What do I do if IR35 applies to my contract
There’s no need to worry if you feel that your work might come under IR35 legislation. It basically means that you’ll have to adjust your tax and National Insurance contributions for that particular contract. However, if this is the case, it might be worth seeking the advice of an accountant.

We’ve only really covered the basics of the ins and outs of IR35. To get a more detailed guide of how it works, check out our spotlight partner, SJD Accountancy’s in-depth IR35 guide here.

 

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