Accountancy for Contractors - IR35 - The Rules and Regulations

Working as a freelance contractor, predominantly those in IT, you should already know about the IR35 rules and regulations. The IR35 concerns any contractor who isn't seen as self employed under the Inland Revenue's classification of 'self employment'.

Becoming law through Schedule 12 of the Finance Act 2000, the IR35 rules was put into place to stop freelance contractors from taking their income by way of a small salary and large dividends from their limited companies. The rules ensure that contractors now come under the same taxation laws as anyone doing similar work under a standard PAYE situation.

The primary motives behind the IR35 rules were to thwart those working in the IT industry, it was common practice for them to resign from their permanent job and, after a few weeks, go back to the same job but this time working as a contractor with their own limited company. This enabled them to earn a lot more money for the same job as they were doing previously, additionally, as a freelancer they would be paying less national insurance and tax as a proportion of their income.

Finding out if you are classed as self-employed or employed is dependant on the Inland Revenue; the IR35 rules will apply to those who are not termed as self-employed.

If you are working at a location on a typical 9-5 basis or in an office, as an employee with no direct responsibility and using the equipment supplied at the business premises, then the Inland Revenue would regard you as being employed by that company, this means you come under the IR35 rules.

On the other hand, if you are based from home, use your own equipment for work and have a number of different clients and, then you come into the self employed category. The Inland Revenue looks at all the circumstances regarding your working situation and determines your employment status from their findings. The more indicators there are to genuine self employment the better for you as this way you IR35.

A regular limited company contractor who the IR35 rules don't apply to, would generally pay himself a salary (net of employers and employees' national insurance contributions, and income tax), with the main part of income being in dividends. If you come under the umbrella of IR35 regulations then your income will be significantly reduced in comparison to being termed as ‘self-employed'.

Before accepting a new IT contract, as a contractor you should make certain that the conditions of the contract demonstrate that they are agreeable with the IR35 rules, meaning you are not seen to be an employee of your client. These conditions also apply to the way you do your job, such as where you work and whose tools of the trade you are using.

The IR35 rules are not applied to the person; they are applied to each individual contract. This means that you may well have 5 or 6 different contracts a year, but each one will be viewed individually.

Not everyone is familiar with the IR35 rules and regulations. Many have just done nothing about the change in law as they expect the legislation to soon be withdrawn or some believe it doesn't affect them. Nevertheless, the IR35 is now the law and it is your duty as a contractor to confirm if you fall within their rules or not, if you do you need to adjust your tax payments accordingly.

To avoid the IR35 regulations, your contract and a working practices have to plainly demonstrate that you are 'self employed' according to the HMRC's employment status rules. For those of you who are confused by this issue, then check online for specialist contractor accountants with expertise in IR35 and IR35 Rules. Online IR35 accountants can offer clear and straight forward advice and provide a free tax calculator to help you calculate your take home pay.

Check out a few websites for high-quality contractor accountants offering accountancy for contractors and accountancy for freelancers in the UK and find out how they can make certain you comply with IR35 regulations.

Michiel Van Kets provides article services for Gareth Hoyle who works for Clear Sky, specialist contractor accountantswith expertise in IR35 regulations and IR35 Rules. Visit the website for advice and tips, use the free tax calculator.