You may work for yourself but the taxman may not see it that way!
Home > You may work for yourself but the taxman may not see it that way!

You might run your own company but HMRC may think you should be treated as an employee for tax purposes if the ‘IR35’ rules apply to you. HMRC have recently issued some guidelines that you can use to assess your situation to determine the likelihood of falling into this category and being looked at by HMRC.

IR35 rules apply if you provide services through a limited company rather than being directly employed by your client. The rules are designed to stop people using the tax and National Insurance advantages of using a limited company when they would have otherwise been an employee.

The full details of the guidelines and new “business entity tests” are here http://hmrc.gov.uk/ir35/guidance.pdf but in summary, the tests ask questions such as:

  • Do you have business premises?
  • Do you need to have Professional Indemnity Insurance?
  • Do you employ any staff?
  • Have you spent more than £1200 last year on advertising?
  • Do you have bad debts amounting to more than 10% of turnover?
  • Can you send a substitute to complete the work?
  • Have you had the opportunity, in the past 2 years,  to increase turnover by working more efficiently?

Your answers point to whether or not you would be an employee if you worked for your client directly and not through your company or partnership.

Depending on your answers, you are allocated points and your points total determines the risk of being within IR35 and therefore of interest to HMRC.

If the IR35 rules to apply to you you will find yourself being subject to a special tax calculation which means paying more tax.

Clearly there are lots of issues raised here –  what about someone who works, on their own, from home, gets their business from word of mouth rather than having to advertise and whose clients pay their bills quickly?  They may be put into a medium or high risk category but probably should be low risk.

IR35 rules are complicated and if you think you may be caught by them you need to act to avoid being penalised. There are steps you can take to ensure that your business is set up correctly so that you pay the right level of tax.

If you have any queries or concerns about this, drop us a line.

 

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