Contractor and IR35 myths debunked

Contractor and IR35 myths debunked

As you head to work on a Monday morning do you ever stop to think how many of these people rushing past actually work for themselves?  Recent ONS figures show that over 730,000 people are self-employed, the highest figures since records began 40 years ago.

Since the economic crash in 2008 people have jumped at the chance of self-employment – which brings freedom. You can be your own boss and reap the rewards of your own hard work. And as you grow it gives you the opportunity to take on more people to help build your business.

With 47% of university graduates forced to take non-graduate jobs, freelancing or self-employment is becoming a popular option for those fresh out of university.

Those in the technology and media industries have a wealth of opportunities to become freelancers and will be part of a strong business group that continues to grow steadily.

It is now common practice for businesses to hire a freelancer, or contractor as they can be known. Not only can they be more cost effective but they also have a wealth of knowledge and experience which can be extremely attractive to an expanding business.

A report by the Recruitment and Employment Confederation revealed that the majority of UK employers plan to hire more contractors, for both short-term and long-term job contracts.

Despite contractors receiving no sick pay, holidays or pensions, many consider freelancing a lucrative option as they can demand a higher rate of pay.

However, a recent number of cases has flagged up the need for freelancers to differentiate and protect themselves, not only to manage the liability within the business but to clearly define the relationship between both parties regard HMRC IR35 regulations.

In 2009 Dragonfly Consultancy Ltd lost their case against HMRC and were ordered to pay £99,000 in backdated taxes. John Bessell was contracted by AA to become a systems tester between 2002 and 2003 but after a judge deemed that clauses in his contractor agreement were added to get round IR35, he was forced to pay.

Essentially the aim of the IR35 legislation is to ensure that individuals are working as a contractor rather than an employee in order to reduce their tax liability and National Insurance contributions.

If you are caught then you can face paying years of backdated tax, obviously not a good option for a university graduate with student loans.

Issue like who owns the client and client contact, payment terms and the issue of the ownership of intellectual property are key in a contractor agreement.  A diligent approach to contractor management will help the company manage the risk of hiring a freelancer or contractor and allow both parties to benefit from the agreement.

From a HMRC perspective it’s critical that both parties differentiate themselves by catering for the IR35 issue within the contract.

 

Common contractor myths debunked

                                                                                                    

  1. I don’t get holiday or sick pay so I am not an employee.

Whilst getting these benefits obviously points towards being an employee, it isn’t enough proof, in terms of IR35, that you are not an employee. IR35 regulation requires further differentiation apart from sick and holiday pay.

  1. In terms of IR35, the regulation applies when I have been working as a contractor with the same company for 2 years.

IR35 depends on how and who you work with on a contractual basis. The day to day client engagement and the shape of that relationship is much more important that how long you have been working in one place. The perception may be that the longer you work somewhere the more likely you are to be deemed as an employee, and HMRC may use this information when assessing your employee status.  Again, the risk of this issue can be managed in a contractor’s agreement.

 

  1. I have other clients so I am definitely following IR35 regulations.

It is important to remember that IR35 applies to each individual commercial contract. Having more than one client helps to show that you are on the right side of IR35 however there is other criteria to demonstrate IR35 compliance. The majority of this criteria is echoed in the contractors’ agreements.

 

 

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