What does IR35 mean for contractors?

IR35 is a piece of legislation which allows HMRC to treat private contractors as if they were employees. It was introduced to combat the problem of "disguised employment", where employees offer their services via limited companies to pay less tax and National Insurance.

As an independent contractor, there may come a point in time where you need to consider subcontracting-you might decide to take on work as a subcontractor, or hire a subcontractor for your projects.

Whichever option you're exploring, how do you decide if the benefits truly outweigh the cons? And are there important tips you need to keep in mind?

IR35 is a piece of legislation which allows HMRC to treat private contractors as if they were employees.

It was introduced to combat the problem of "disguised employment", where employees offer their services via limited companies to pay less tax and National Insurance.

As a contractor, there are various key aspects you need to understand about IR35. These are:

• What you need to do to structure your contracts and working arrangements such that they fall outside of IR5
• April 2020-2021 IR35 reform
• FAQs relating to the IR35 reform, and what you can do to prepare for the upcoming changes
  

We've elaborated on these points in detail in our IR35 guide.

There are a few steps you'll need to consider with hiring contractors. These include:

• Sourcing for contractors
• Assessing contractor CVs
• Interviewing a contractor
• Payments
• Contract terms
• Terminating a contract

To become a contractor, you need to:

• Do your research: The first step you'll need to do is to conduct in-depth research, and think through various important factors-from finances and tax implications, to lifestyle and business opportunities-to ascertain if becoming a contractor is the right decision for you.
• Decide on how you'll operate: As a contractor, you may operate as a sole trader, through your own limited company, or work with an umbrella company or recruitment agency.
• Develop a business strategy: Strategic planning isn't set in stone-but working out a plan is still helpful, as it is a way for you to consider multiple perspectives, identify potential opportunities and pitfalls and conceptualise back up plans you could fall back on.
• Get your business finances and insurance sorted out: Setting up a business bank account, registering a company, determining the level of accounting support you need and investing in business insurance are important aspects you need to sort out before you begin contracting.

The disadvantages of contracting are:

• Uncertainty: Due to the flexible nature of their working relationships, contractors aren't guaranteed work after the end of assignment or project.
• Responsibility: Not only is it the responsibility of the contractor to find work, they are also responsible for their own finances.
• Employment rights: As a contractor, you generally wouldn't find yourself holding employment rights that permanent employees benefit from.

So, you're thinking of becoming a contractor.

There's probably one of three reasons driving this:

You've received a Job Offer

You've just received a job offer, and now need to decide on whether to set up a limited company, umbrella company or become a sole trader (or you may not have the choice in deciding).

You're in the right place.

This guide will walk you through the best company structure for you, accounting support, VAT, business services you need to consider and finding new opportunities.

You want to increase your pay

You'd like to increase your pay by switching from permanent roles to interim/ contractor roles.

Contracting can be very lucrative.

You'll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days).

However, you'll earn more, get greater flexibility and hopefully grow a consulting business.

Project Flexibility

Getting multiple requests for your services? Amazing.

Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.

You can still set this up as a current PAYE employee of a company, and this can be a great stepping stone to launching your own business.

Let's talk about the right business structure for you.

IR35 is a piece of legislation which allows HMRC to treat private contractors as if they were employees.

It was introduced to combat the problem of "disguised employment", where employees offer their services via limited companies to pay less tax and National Insurance.

Will it affect me?

IR35 is usually a threat to your income only if you are self-employed, and provide your services via a limited company.

HMRC may decide that you should, in fact, be paying tax and NI contributions as if you were an employee.

What would that mean?

If your contract is found to fall within IR35, then the difference in take-home pay usually amounts to around 20%.

But that's not all.

HMRC may choose to investigate previous contracts going back at least 6 years to see if they should also have come under IR35. So this could mean a higher tax bill and a bulk payment for previous unpaid tax, plus penalties and interest.

What do I need to do?

You need to structure your contracts and working arrangements in such a way that they fall outside IR35.

Your objective is to stop any enquiry by HMRC before it has a chance to get off the ground. This is usually not that difficult to do, but the process is technical and a bit complicated.

If you are a legitimate contractor trying to make your way through a busy year without falling foul of HMRC's complicated IR35 legislation and obscure assessment process there is a clear and straightforward action plan below.

• What is a contractor
• Types of contractors
• Contractor business structures
• Contractor accounting
• Understanding IR35
• Contractor insurance
• Banking for contractors

Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.

If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.

The IR35 private sector reforms will take effect from April 2021.

You've been thinking about making the leap from employee to self-employed. If contracting is one of the options you're considering, this article is for you.

We'll run you through the basics, including what it means to be a contractor, how it differs from full-time employment and the type of business structures that contractors typically choose.

Contractors are self-employed individuals who provide services to a business. Generally, they're highly skilled, and are hired for projects that require specialist skills or to bolster a team during busy periods.

IR35 means that contractors will need to consider their true employment status when working on an assignment to ensure that the correct tax is paid according to their status. This is currently especially true for those working in the private sector (in the public sector, the contractor will often be told their IR35 status before the engagement begins).

You have an important project at hand, and you require a contractor's specialist knowledge to fill in the skill gap in your team. You're ready to hire-except that you're unfamiliar with the hiring process.

If this is your first time hiring a contractor, our article will guide you through the essentials.

We'll cover the following:

• Sourcing for contractors
• Assessing contractor CVs
• Interviewing a contractor
• Payments
• Contract terms
• Terminating a contract

• What is IR35
• Who IR35 impacts
• Planning for IR35
• IR35 Action Plan

The advantages of contracting are:

• Flexibility: Contractors have a lot more control over their work life often deciding when they work, where they work and how they work
• Increased earnings: Contractors are often paid more due to their skillset and the flexible nature of their working relationships. Additionally, contractors who operate through their own limited company can benefit from tax efficiencies.
• Greater development: Often working with multiple clients throughout their career, contractors are exposed to a lot of opportunities to develop their skills and build on their experience in their area of expertise.
  

Firstly, we'll start with the services that we provide which covers the critical things you'll need to start and operate your contracting business.

For those just getting started, we provide free company registration on Companies House. This is typically done within 24 hours of submitting your details to Forma. It can take under 5 minutes to provide all your details and we'll just need a proof of ID and proof of address for each of the company directors.

We cover all of your key company filing requirements like annual accounts, confirmation statements, corporation tax and ensuring you meet all filing deadlines.

We also help with your annual Self Assessment which is a requirement for all company directors.

Currently, in the private sector, the responsibility for IR35 lies with the contractor themselves. In the public sector however the hiring organisation will need to determine the IR35 status of the contractor before the work begins. Changes to the current IR35 legislation proposed for April 2021 will see this also apply to most hirers in the private sector too.

Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.

If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.