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As a freelancer or contractor there are a lot of things to think about from completing your current project to advertising and looking for your next job. However, one of the most important aspects, and often one of the most dreaded, is to think about finances and accounting.
There are many reasons that you need to keep on top of your finances, the most important of which is that it is a legal requirement to pay tax. If you are found to be paying the incorrect amount you could incur serious penalties.
Part of the Finance Act 2000 is IR35, but many people get confused about exactly what this is and how it works in practice. Below is a short guide with some helpful advice explaining all about IR35.
What is IR35?
The primary aim of IR35 is to prevent those who are self-employed, such as freelancers and contractors, from avoiding paying tax by simply performing the same functions as regular employees.
For example; an employee of an IT company could leave his job at the end of one week and return the following week fulfilling exactly the same role only now as a contractor.
Employees of companies and those who are self-employed pay tax in different ways and those who are self-employed can benefit from tax efficiencies. IR35 is in place simply to ensure that the amount of tax being paid is fair and correct.
Who does it apply to?
IR35 is a complicated piece of legislation and defining exactly who falls under its remit is far from straight-forward. However, there are some indications which suggest whether you are likely to fall foul of the regulations.
Working in a client’s premises exclusively, using their equipment or being subjected to ongoing supervision are all signs which point towards ‘disguised employment’ rather than a true freelancer or contractor status. However, this is far from an exhaustive list; HMRC has a guide which lists many of the things which could be regarded as contributing towards ‘disguised employment’.
What is ‘Disguised Employment’?
‘Disguised employment’ is when a person appears to be working as an employee of a company rather than being a genuinely self-employed freelancer or contractor. Contractors and freelancers must prove that they are genuinely self-employed and aren’t getting the benefits and perks of working for a company such as meals, parking etc. while still claiming tax breaks.
If a person claiming to be self-employed is found to actually be in ‘disguised employment’ they will have to repay all of the money they have made through tax efficiency schemes and all of their earned income would be subject to PAYE income tax and national insurance.
Ensuring You’re in the Right Place
Figuring out whether IR35 applies to you or not can be very difficult. There are some tests that you can undertake periodically online to make sure you’re legally ok, but ultimately it can be quite difficult.
One of the best ways to ensure that you don’t fall victim to IR35 is by employing an accountant. With their extensive legal knowledge and past experience they will be able to handle all of the tax forms and legalities, including ensuring that you can adequately prove you aren’t in disguised employment.
IR35 may seem quite complicated at first, but with a closer look it is a little easier to understand. With this short guide you should have a deeper knowledge about what exactly IR35 is and how you can avoid falling foul of the legislation.
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