Whether you are an IT contractor, engineer, offshore worker or consultancy service provider getting to grips with the implications of IR35, and the self employed/employed debate can be one that can seem quite daunting or may leave you open to a negative response from HM Revenue and Customs.
Some people use the terms ‘contractor’ and ‘freelancer’ interchangeably but, although they have certain things in common (such as being self-employed), there are some important differences.
For one thing, contractors tend to dedicate themselves to a single client for either a set period of time or for the lifetime of a particular project whereas freelancers generally work for more than one client on a number of different projects at once.
Also, contractors routinely work on a client’s premises while freelancers ordinarily have their own workspace or work from home.
You may be considering going down the contracting route or you may have already decided to do so. Either way, you’ll have some questions to think about.
Choosing how you work is probably the most important decision you’ll have to make when starting out in business.
As a contractor, you can kick-start your own business in one of four ways:
- Working as a sole trader.
- Setting-up a limited company.
- Joining an umbrella company.
- Being paid through a recruitment agency.
Deciding which option you take involves weighing up the risks and rewards of each. Our team is on hand to help you make the right call.
IR35 is a piece of legislation that can apply if you’re working for a client through an intermediary or ‘middle man,’ whether it’s another person, partnership or limited company (sometimes called a ‘personal service company’).
It’s there to ensure that you pay the right amount of tax and National Insurance contributions (NICs) when your relationship with a client is pretty much the same as an employer-employee relationship – where tax and NICs are paid through the Pay-As-You-Earn (PAYE) system
If you work as though you’re outside IR35, but HMRC finds that you’re actually inside it, you can incur penalties and be charged interest on underpaid tax and NICs. So, it’s important that you have an expert consider your situation so you can find out where you stand.
If you’re a sole trader or work through a limited company, your take-home pay can be much higher if you register for Value Added Tax (VAT) – normally, on the Flat Rate Scheme (FRS).
If you sign-up to the FRS, you pay over a smaller proportion of the VAT collected from your clients and keep the balance, which may mean significant savings and increased profits for your business in the first year.
What’s more, if your clients are VAT-registered, they can reclaim the additional 20 per cent you charge them when they file their VAT Returns, so it won’t cost them a penny. So, it’s a win-win situation for you and your clients.