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Originally called the Intermediaries Legislation, but better known as IR35, this law was introduced towards the start of 2000. The purpose of it is to prevent tax evasion through the use of personal service companies. This is done, not by identifying those doing so, but simply by taxing such companies (which do have a legitimate purpose) the same as individuals are taxed. Obviously, people have not liked this, especially freelancers who frequently take considerable risks in their business. Almost all freelancers are self employed, and so can easily be caught out by this new tax. A contract that is well phrased and clear will be fine, but the smallest mistake in word choice can be enough to sink you. The easiest way to solve this problem, is just to have your contract checked over by an expert. A qualified IR35 reviewer will look over it for about 120. This is really a very small amount, considering the thousands of pounds that you stand to lose if you get it wrong. It's plain, good economic sense to get your contract reviewed. Before you send it off for review, I'd suggest you check some things yourself, just to see if there's anything that you obviously need to change. 1. Does your company bear the financial risks of failure? [Yes = Good] 2. Will your sound management be profitable for your company, in performing the contract? [Yes = Good] 3. Is your company permitted to send alternative personnel? [Yes = Good] 4. Does your company bear the risk of bad debts? [Yes = Good] 5. Is your contract a "Contract for services" rather then a "Service contract"? [Yes = Good] 6. Are you eligible for holiday or sick pay? [No = Good] 7. Are you in a "master and servant" relationship with your client? [No = Good] 8. Do you have mutuality of obligations with your client? [No = Good] If you are a UK freelancer and all of the above check out in your case, then you might stand a good chance of staying outside IR35. But a word of warning about contracts: It's not just about WHAT is written, but also the WAY it is written. When reviewing contracts, IR35 experts look very closely at wording and phrasing. They know that poor wording can create a chink in your armour that the tax authorities can exploit. So, step one in surviving IR35 is to get all contracts reviewed by an IR35 expert before signing. If the expert advises that the contract or part of it should be changed, get it changed before signing.
Article Source: http://www.financemanual.com
This article has been provided by the companies Home Loans Direct and Small Business & IR35 Contractor Accountants Antony J. Holdsworth & Co.
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