Freelancers, contractors and consultants working via their own limited companies have been urged to take it upon themselves to check their IR35 status – in a move which could help ensure their clients set status correctly and in turn, compliantly boost their take home after tax by anything up to 30%.
The recommendation comes from IR35 compliance expert, Qdos, which has witnessed first-hand contractors safeguarding their IR35 status in recent months and in some cases, overturning incorrect IR35 status decisions made by their clients.
Following changes to the IR35 rules, businesses engaging freelancers and contractors are now responsible for setting IR35 status, which determines if a worker pays tax as a self-employed individual or should be classed as an employee for tax purposes.
Given the complexity of the IR35 legislation, which aims to prevent what’s known as ‘disguised employment’, it’s not uncommon for businesses to incorrectly determine IR35 status or insist that all contractors are engaged on the payroll and subject to employment taxes, irrespective of whether they are genuinely self-employed.
However, according to Qdos, putting forward evidence to a client that supports outside IR35 status, can be decisive in ensuring that a correct determination is made initially or challenging an incorrect status decision.
Qdos CEO, Seb Maley, explained:
“The difference between a contractor working outside of IR35 or on the payroll in whatever capacity is significant. For instance, if a business decides that your contract belongs inside IR35, you could take home anywhere up to 30% less after tax. So it’s worthwhile that any genuine contractor does whatever they can to demonstrate to their client that they’re self-employed.
“While some contracts do belong inside IR35, we’re still finding that far too many contractors are being misclassified by their clients and are effectively forced inside IR35. The financial hit contractors take in this scenario is huge, which is why it’s worth exploring ways to safeguard and effectively prove your outside IR35 status.
“Granted, some clients may have already made up their minds and won’t reconsider their stance. However, as the message starts to get through that IR35 reform is manageable, we’re noticing that more businesses are open to rethinking their position.
“While all of the above is important for contractors working with medium and large businesses, those engaged by small businesses remain responsible for determining their IR35 status and liable for any mistakes. With this in mind, being able to demonstrate your compliance remains vital in the event that HMRC launches an investigation.”
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