Disguised employment alludes to those contractors working via their own limited companies, who are providing services to their clients in the same way as a normal employee. This allows said person to benefit from paying less in contributions as no National Insurance payments are due on company dividends. Whereas traditional employees pay both income tax and National Insurance on their entire salaries
Prior to 2000, the numbers of people operating under such terms were rising rapidly, and as a result the Intermediaries Legislation was created to combat the problem of disguised employment. If any person is deemed to be in breach of IR35, the potential loss is significant as the vast majority of any income earned will be subject to income tax and national insurance via the PAYE system.
Are you IR35 compliant?
If you're a contractor operating via a limited company, you may be selected for a compliance check by HMRC. If this occurs, your working practices and contract arrangements will be scrutinised to determine whether you are technically 'employed' or 'self-employed' in the eyes of the tax man.
It's strongly advised that you seek legal help when constructing your contract terms as the wording can play a big part in the result of the assessment, if you get selected. There are a number of things that are considered to construct a picture of a contractor's employment status. The main points to be taken under consideration are:
- Control – is that person under the direct supervision of the client?
- Substitution – Would the contract permit the contractor to provide a colleague as replacement cover, if they are unable to work?
- Mutuality of Obligation – Is there reasonable expectation of future work once the current contract expires?
Additional to these points, the actual way in which you perform the role will be considered to decide if you're a disguised employee or not. For example if you are working as part of a team of regular employees under a team leader, it is unlikely that you would be considered as self-employed, unless perhaps you were able to justify that your particular role and skill-set were distinctly different from your employed colleagues.
The Cost of Getting Caught
For first time contractors it may seem daunting to take the plunge, but it's worth mentioning that a whole industry has arisen since IR35 was introduced, aimed at protecting customers from the trap. One thing to bear in mind is that if you do get caught, you're not really any worse off than if you'd been employed on the same terms, as there are currently no fines or penalties; HMRC merely reclaim the tax you're deemed to owe.
How much you'll have to pay will depend on your daily rate. It's a good idea, and fairly easy, to find an online calculator which will allow you to calculate your income based on both an employed and self-employed basis, so you can see the difference of what you might owe.
Protecting Yourself From IR35
If you're contracting via an umbrella company, IR35 is not applicable, and you can rest easy. Sadly you'll still be paying NIC on your income though, so if you're regularly contracting it may be worth thinking about switching.
If you've your own limited company, you should thinking about taking the following actions:
Have your contract terms reviewed by an employment specialist. They will look at whether the wording and working practices are likely to be caught by IR35, and suggest revisions where possible to make it watertight
You can insure against just about anything now, and IR35 is no different. You can cover yourself against any monies you owe in back-taxes, as well as the cost of any legal representation in the event of an IR35 compliance enquiry being called. IR35 is affordably priced at less than £200 per year, and is well worth the investment if you're a 'borderline' case.