The Telegraph this week reports that as many as 600,000 people are cutting their tax bill by opting for a Limited Company payment structure. The majority are contractors who, by taking specialist advice or going through an Umbrella, do it the right way.
But there are many who are not contractors. They’ve set up shop as a Limited entity purely for the tax-breaks on offer. It’s the latter who could well be staring an IR35 barrel in the face.
How many contractors are at risk in the UK?
According to the ONS, the official figure is 300,000 one-(wo)man-bands operating this way. But many who go limited also designate their spouse as an employee.
The appointment of a non-working better half allows first for additional household tax saving. But this tactic also explains why over 500,000 self-employed workers choose this payment structure.
Why is this a problem?
IR35, or intermediaries legislation, was introduced on the 6th April, 2000. Its purpose was to weed out disguised employees, back then handled by third party management companies.
The problem arises when the job the self-employed person undertakes can in no way be differentiated from that of an employee. It has to be this way as there remains no clear definition of the difference between employment and self-employment.
The IR35 team will try to build up a picture of your working relationship with the client. If you go through an Umbrella company and agency, there is an assured distance. But if you have a pre-existing relationship, that’s when the waters get muddy.
What are the consequences of being found inside IR35?
Let’s clear something up, first. HMRC has stated that there’s no such thing as an IR35-proof contract. But we can ensure that we, as contractors, look like a company trading in our own right.
Amongst many things, we can pay for our own stationery, actively network and market our business and hire an accountant. Demonstrating that we pay ourselves in a fashion that befits a business, not an individual, is often overlooked. It shouldn’t be!
We also need to understand how hot HMRC is on IR35 cases. Earlier this year, the taxman fined two entire government departments. Yep, even their own.
And that set a precedent. Soon after, 100 civil servants who were being paid off the books, including some holding lofty positions in the National Health Service, got the boot, too.
For many contractors who get caught inside IR35, the consequences are dire. Almost all avenues of tax-saving are closed down. Their pay defaults back to PAYE. And because they have to pay both Employee’s and Employer’s NICs, they can actually be worse off!
It’s well worth checking out the Telegraph article. They have two examples of operating through a Limited Company incorrectly (inside IR35). And one that ticks all the right boxes – that’s the one you should really pay attention to.