An IR35 Investigation is a Contractor’s worst nightmare. The HM Revenue and Customs may take months going over company records, assessing service contracts, speaking to client representatives and going in detail through financial transactions.
If a contract you’re working on is considered to be Inside IR35 you must pay full Income Tax and Class 1 National Insurance deductions (Employers and Employees) on salary payments made throughout the year.
If your Contract is Outside IR35 you have freedom to claim many more business related expenses than if your contract were Inside IR35. Claiming expenses is a great way to reduce your Income Tax & National Insurance liability.
IR35 Status is not solely dependent upon contract terms and conditions. Actual ‘working arrangements’ are now one of the most important factors in determining whether someone is or is not caught by IR35.
Aside from the main factors (Right of Control, Substitution and Mutuality of Obligation) there are a number of other contract factors that should be addressed before an agreement is signed.
Mutuality of Obligation is a key point in an IR35 contract. If a ‘Mutuality of Obligation’ exists you will certainly be Inside IR35. Therefore it’s very important that they agreement if for a fixed period after which time both parties go their own way.
‘Right to Control’, i.e. What work is done, Where work is done, When work is done and how work is done, is an important aspect of IR35 Contracts. If the Client has significant influence over all four you will likely be considered ‘Inside IR35’, therefore you won’t be able to take tax efficient Dividends.
Contract Terms and Conditions are the most important initial factor in determining IR35 status. If you fail to address the contract and ensure that terms are considered ‘Outside IR35’ you could leave yourself open to an IR35 Investigation and possibly a large tax bill in years to come.
If you go into business with your own Contractor Limited Company you need to know which of your contracts are Inside IR35 and which are Outside IR35. If you take Dividend Income from a contract Inside IR35 you could wind up with a large tax bill at an HMRC Investigation.