Ah, the good old IR35 legislation! Introduced way back in 2000, the complicated IR35 rules have since left some individuals unsure whether or not their limited company falls within the legislation. The number of grey areas in the legislation is unfortunately rather high, but we’ve done our best to provide a dose of much-needed clarification. 

The rules have remained largely unaltered over the years, but a number of judges have found the wording of the rules to be very much open to interpretation. Speculation recently hit the headlines regarding a potential rule change, but the government has failed to push this through. Instead, brand new guidance for the owners of limited companies was brought into play. 

This guidance presented a number of questions intended to help limited company owners find out whether they fall within ir35. Basically, the tests are there to help simplify the very early stages of any potential future investigation from HMRC. This means that sole traders, contractors, and limited company owners must still provide accurate documentation proving that they are operating a legitimate company.

Let us, however, go right back to the beginning. The IR35 legislation was originally introduced by the British government in a bid to bring an end to ‘disguised employment’, a term which refers to individuals leaving their full time employment before returning to the same job immediately as a contractor, thereby working through their own limited company while simultaneously reaping the advantages of numerous employee benefits.

HMRC, meanwhile, through tax benefits, still wanted to make company ownership an attractive prospect for potential entrepreneurs. Some people, when struck by the initial idea of setting up their own company, find it hard to imagine the long-term benefits of giving up the advantages of being an employee (such as sick pay, holiday days, pension contributions, and notice period). HMRC was therefore keen for tax benefits to represent something of a lure for new limited company owners.

To dig a little deeper, if you wish to stay outside IR35, you need to demonstrate that you’re working with the same level of control, responsibility, and risk as other limited company contractors within the same industry, while also possessing working practices that fully reflect your contract. If you want to check this properly, why not give specialist contractor accountancy a call for a free verbal review? 

Let’s pretend for a second that your contract and working practices appear to reflect those of an employee. In this instance, it’s likely that your contract will fall within IR35 legislation. There may, however, still be an advantage to working through your own Limited company. You will, for instance, still be able to claim accommodation and travelling expenses, as well as 5% of your turnover. The VAT flat rate scheme, which allows you to receive interest on the funds held within your own company in the form of dividends, should also prove appealing.

In conclusion, you can see that this is all a delicate (and hard to strike) balance between tax relief benefits, employee perks, and investing funds within your own company. The key ultimately is being honest and transparent about your daily business life and practice, while maintaining thorough and accurate records through documentation of your expenses and earnings. If you do this, there is no reason for the IR35 to give you sleepless nights!