How to avoid getting caught by IR35
Firstly, if you don’t know what IR35 is you probably don’t need to read this article. It’s basically the set of rules used by the UK tax authorities (HMRC, Her Majesty’s Revenue and Customs) to get contractors using their own or umbrella companies to pay tax as though they are "normal" employees of the client they are working for at the time.
Now I would agree that this is appropriate where the contractor is indeed acting like a permanent employee, say where they are working for a lengthy period of time at their client’s offices and are working according to their clients rules, usually on a time and materials basis over a standard 35 or 40 hour week.
However, it is wholly inappropriate in cases where a contractor is genuinely acting like a third-party company. Indicators for this include working on a short-term basis, working for more than one client, not working on the client’s site for a significant proportion of the time and being paid piecemeal for any work done (ie. on a fixed-price basis). I would argue that any one of these is sufficient to show that you aren’t trying to diddle the system but, based on my own experience, HMRC only seem to attach weight to the last of these. You can understand them for being a bit stringent as contracts that are IR35-exempt allow avoidance of national insurance contributions by paying dividends. However, if any of these factors are relevant to you, especially the fixed-price one, I would urge you to write or email HMRC and try for written IR35 exemption. Having done this, they were happy to help and, although I received an email confirming my exemption, they had their normal cover-their-arse approach by stating that they reserve the right to change their mind. And they wonder why we have no respect for civil servants!
I myself take a measured approach to paying salary versus dividends as you still need to pay enough salary each year to qualify for the state pension and if you have a personal pension any contributions you make might be limited based on your annual salary.
More details can be found at HMRC’s web site.
Ian Matthews
Free online dating at Daydream Dating.
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