What is IR35? (www.thefpllp.co.uk)

UK
(SANEPR.com) January 3, 2008 -- Those contractors who fall under the IR35 rules will be liable to Schedule E taxation and National Insurance (N.I), following deductions for expenses. Income will be in the form of a 'deemed payment', following these deductions. It is also possible that Contractor Companies may have a mixture of IR35 and non-IR35 turnover, in which case income and reward associated with unregulated contracts will escape these rules.

Normal Section 198 expenses may still be claimed. In addition, there is a provision for other intermediary expenses of 5% of a contractor's annual turnover.

The following expenses can therefore be claimed in addition to the 5% allowance:

1) Pension payments - either personal or executive schemes

2) Business travel - incurred in the course of business duties

3) Subsistence - accommodation, meals when away from home

4) Professional Indemnity cover

5) Benefits in kind - e.g. private medical insurance
However it should be noted that training expenses will not form part of the above allowance. We would strongly recommend contractors to seek legal advice to determine their position under the rules. If you are caught under IR35, you may be able to change the way you work (working practices) and use an IR35 'friendly' contracts to help bypass the legislation.

Are you 'Self Employed'?

The first step is to establish whether you are 'employed' or 'self employed' under the terms defined by the HM Revenue and Customs, this can be found out at http://www.inlandrevenue.gov.uk/pdfs/ir56.pdf. The ambiguity of the 'employment status' guidelines does not help the matter.

The HM Revenue and Customs state that they will take an overall view of a contractor's position to determine whether they will be deemed 'employed' under the new rules, therefore any amended contracts should also reflect your working practices.

It is clearly in all contractors interests to be viewed as 'self employed', or at least for part of your income to be IR35-free. If you are able to diversify your business interests, or change your working practices in order to satisfy more of the conditions to 'self employment', your position will be strengthened.

Mr. Jayesh Shah, one of the Partner at The Financial Partnership LLP, said “In essence, there are several ways to escape the IR35:

a) Satisfy the conditions listed by the HM Revenue and Customs that you are 'self employed'. This is the ideal option. This will typically require an 'IR35 friendly' contract, with working practices which match those stated in the contract.

b) Contract Overseas - leave the United Kingdom for sunnier weather and get taxed on a fairer basis elsewhere. Of course, there are many other reasons why contracting overseas may also appeal to many (better climate, less pollution, cheaper accommodation and living costs, etc). Whatever your reason for making the move, you should be aware that overseas tax laws are equally or more complex than those in the UK, so you should consult a tax specialist before you leave, otherwise you may not necessarily be any better off financially.

c) Go Permanent - contracting is a way of life - if you enjoy it, you should go for one of the previous options before thinking about going permanent. On the other hand, this may appeal to some contractors who find the uncertainty over IR35 unbearable and prefer to feel more secure about their future.

d) Do Nothing - many contractors have not addressed the IR35 issue - either hoping that the legislation will be revoked, or believing that it will not apply to them. We would strongly advise against this approach to everyone. Although we all hope that this or a future elected government will withdraw this complex legislation, IR35 is now a law, and all contractors caught by the rules should make arrangements to meet the increased financial burden.”

For more details or advice on this article, please contact us on 020 8241 6642 or visit us on www.thefpllp.co.uk and one of our specialist will be pleased to assist you.

The Financial Partnership LLP, London - Richmond, is young, dynamic and innovative firms of Accountants & Business Advisors who can help improve the performance and profitability of your business.

We believe your accountant should not come as a cost, but as a valuable resource, who is easily approachable and readily accessible. We are committed to working in partnership with you in your business, to identify opportunities, improve your bottom line figure ’Profitability’ and also support you in realising them in the most tax efficient manner.

This release is brought to you by The Financial Partnership LLP (Chartered Certified Accountants & Business Advisors) ¬ www.thefpllp.co.uk where all your accounting, business and financial management and planning needs are catered.

(Disclaimer - The content of these guides is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, no responsibility can be accepted for any action undertaken or refrained from as a consequence of this material. This information is for general guidance only. Specific professional advice should always be obtained based on personal circumstances. The Financial Partnership LLP or any of its partners and employees accepts no responsibility whatsoever for any action undertaken or refrained from as a result of the information contained herein.)

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The Financial Partnership LLP
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Richmond
Surrey
TW9 2JN
P – 020 8241 6642
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www.thefpllp.co.uk