Heard of it? Most have but still it manages to send a shiver or two down the spine of even the most newbie contractor or freelancer who’s not quite sure!

So what actually is it? Well essentially it’s the Inland Revenue’s (HMRC) definition of ’self employment’ and it’s designed to catch those who are contracting for a company in a position that should, in the eye’s of the Inland Revenue, be a full time employee of that company.

So why you may be asking yourself? Well, the HMRC hate the idea of a contractor benefiting with the lower taxes and lower National Insurance (N.I) they would be liable for and of course find it far easier to collect the taxes via PAYE!

So in Inland Revenue speak, 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. In short it’s much much more expensive and removes all of the tax benefits the contractor or freelancer would have created for themselves.

Contractor’s 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 expenses may still be claimed and 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:

• Subsistence - all meals away from home and hotels etc
• Business travel - only during the course of your business duties
• Benefits in kind - private medical insurance etc
• Pension payments - personal or even executive schemes
• Professional Indemnity cover

Unfortunately training expenses can not be claimed as part of this allowance.

So if this is all double dutch and you want to get your position checked out in detail, I would thoroughly recommend that you simply join the PCG, the Professional Contractors Group (http://www.pcg.org.uk) who for as little as £120 per year with provide all manner of help and advice and provide a tax investigation insurance, just incase the HMRC want to do an IR35 investigation on you!

There are some great companies that will check out the contracts you have with your customers and estimate whether you are liable or not. I’ll find out some recommended ones and report these later.

Any ways of protecting against IR35?

• Show that you are ’self employed’, as per the Inland Revenue definition of the terms. The perfect way to present yourself via an IR35 compliant contract will come to light following some work with a company that can prepare contracts of this nature.
• Offer a service akin to what a company would offer. In other words if you can provide other additional resources via your contract with the customer you are far safer. What do I mean? Well say you are a programmer, you could bill another programmer through your contracting or freelance business for example. It could even be a copywriter if you was providing a website say. Yes, I agree it’s more risk to you but it really makes you look like a business offering and not a single person to the HMRC.

photo credit: x_jamesmorris