In the UK, there is a tax legislation called IR35 that is created to tackle tax avoidance by workers offering their services to clients through an intermediary like a Limited Company. When it comes to hiring a contractor, both public sector organisations and recruitment agencies need to decide whether IR35 applies to the contractors they engage.
It is the responsibility of the public sector to determine whether a particular assignment falls inside or outside contractors IR35 by utilising the HMRC (Her Majesty’s Revenue and Customs) online tool. After that, it is the responsibility of the agencies to source the right candidate and ensure that appropriate tax arrangements are made.
When considering the type of resource an employer needs, it is crucial that you need to know the difference between a temporary worker and a contractor. A temporary worker is considered to cover a vacancy, which is part of the permanent structure. These workers often work according to set times and use equipment by the client under the supervision of the client. A contractor, on the other hand, is considered to deliver a particular piece of work.
Temporary workers fall inside IR35 while contractors are considered outside IR35. If you are a contractor, you need to keep documents to prove that you are outside IR35. If the HMRC conducts an inspection, you will face a tax inspector that will examine your evidence. However, if you show the contract, the judges can simply put it aside if they consider it a sham and make a decision based on your working practices. Here are some working practices that you should consider:
Demonstrate that you are treated differently from employees
You have to demonstrate that you are different from employees of your client. Different benefits and pay are not enough. You have to show that you have a flexible working schedule, bringing your own equipment and working on fixed period are good ways to show that you are independent.
Providing substitute is good evidence showing that you are a contractor. If you provide a substitute on your behalf, it means you have the flexibility to work on another contract with different clients.
Show that you can manage your own assignments
An independent contractor will manage their own assignments not relying on the company for any allocated work. If you manage your own assignments, you can quote a fixed fee for the project.
Work for multiple clients
You have to keep in mind that the more clients you work for, the easier it is to prove that you are self-employed. If you have one client and working for a long period of time, it suggests that you are employed. To fortify your claim, you have to provide your own equipment and pay for your training.
Make sure that client sees you as a contractor
If the client sees you as the extension of their workforce, they will regard you as an employee. You have to ensure that the client sees you as a contractor for a specific reason and they should treat you independently.
Remember that if you are caught, your entire income will be subjected to standard Income Tax and National Insurance Contributions. Contractors of Limited Company enjoy large dividends.