Surviving IR35 - Step 1

Originally called the Intermediaries Legislation, but better known as IR35, this law was introduced towards the start of 2000. The purpose of it is to prevent tax evasion through the use of personal service companies. This is done, not by identifying those doing so, but simply by taxing such companies (which do have a legitimate purpose) the same as individuals are taxed.

This law has become rather disliked, particularly by freelancers, who typically take significant risks in their business. If they have a well written conmtract, then it supports them, and highlights their self employed position. However, if it is poorly written, thenit can undermine them and even fall foul of the dreaded IR35.

The easiest way to solve this problem, is just to have your contract checked over by an expert. A qualified IR35 reviewer will look over it for about 120. This is really a very small amount, considering the thousands of pounds that you stand to lose if you get it wrong. It's plain, good economic sense to get your contract reviewed.

Here are some of the things that IR35 experts check when they review contracts for IR35 status:

1. Does your company bear the financial risks of failure? [Yes = Good]

2. Does your company profit from sound management in performing a contract? [Yes = Good]

3. Does your company have the right to send alternative personnel? [Yes = Good]

4. Does your company bear the risk of bad debts? [Yes = Good]

5. Is your contract a "Contract for services" rather then a "Service contract"? [Yes = Good]

6. Will you receive sick or holiday pay? [no = Good]

7. Is the relationship between you and your client one of "master and servant"? [No = Good]

8. Do you and your client have mutuality of obligations? [no = Good]

If you are a UK freelancer and all of the above check out in your case, then you might stand a good chance of staying outside IR35. But a word of warning about contracts: It's not just about WHAT is written, but also the WAY it is written. When reviewing contracts, IR35 experts look very closely at wording and phrasing. They know that poor wording can create a chink in your armour that the tax authorities can exploit.

So, step one in surviving IR35 is to get all contracts reviewed by an IR35 expert before signing. If the expert advises that the contract or part of it should be changed, get it changed before signing.