What is IR35 and what does it mean for you?

What is IR35 and what does it mean for you?

ir35

Article originally posted here, written by Nick Green, financial journalist. 

What is IR35 and how can you avoid being caught out by it? We explain what this controversial tax change means for contractors and the businesses that hire them, and how to take steps to reduce the risk of being sunk by the IR35 trap. 

Small businesses and freelancers alike have been bracing themselves for an imminent change in a piece of tax-avoidance legislation. This has been pushed back thanks to the coronavirus, but it still means that from April 2021 private sector employers will have to follow the same rules as the public sector with regard to IR35. The Federation of Small Businesses has warned that both companies and contractors will feel the pinch. 

What is IR35? 
IR35 is also known as the ‘off-payroll working rules’. IR35 is designed to prevent workers from avoiding tax by operating as contractors, when really they are employees in all but name. So for example, if a contractor operates via their own limited company, but is otherwise treated the same as their client’s employees, they are considered to be ‘inside IR35’ and will need to make additional tax payments. 

What is the new change concerning IR35?
IR35 was originally introduced by Gordon Brown, to prevent employees from avoiding tax by being treated as contractors. However, since then the legislation has become notorious, sometimes implicating businesses that believed they were hiring contractors appropriately, only for HMRC to disagree. 

Post-April 2021, private sector employers will be held responsible for determining whether IR35 applies to any contractor they hire – which would require them to treat the contractor as an employee for tax purposes. This is already the case in the public sector. 

Private sector businesses will therefore face a tricky choice: continue to treat contractors as contractors and risk a hefty fine if HMRC takes a different view – or treat them as employees with the additional costs and responsibilities this involves. There is widespread concern that genuine contractors will be classed as employees, and so will either take an unfair tax hit, or lose their contracts altogether. 

Are you inside or outside IR35? 
IR35 was introduced because of the way employees are treated differently from contractors. With an employee, an employer must provide a workplace pension, paid holiday, sick pay, other benefits (perhaps) and pay employer’s National Insurance contributions. A contractor, on the other hand, is paid a flat fee and can be dismissed easily if there is no more work for them to do. 

The vast majority of contractors operate as limited companies, either one-person companies or ‘umbrella’ companies. It’s rare for contractors to be sole traders, as unlimited liability make this risky for them, while companies are wary of hiring them in case HMRC thinks they are employees. Operating as a company also means the contractor can pay less tax. 

However, operating as a company doesn’t prevent a contractor from being an employee in all but name – which is where IR35 comes in. Broadly, IR35 says, ‘If it looks like a duck and quacks like a duck, it’s a duck.’ In other words, if the contractor is working like an employee, with similar obligations, then they should be treated as one for tax purposes. HMRC therefore looks very closely at what it calls ‘personal service companies’. 

What’s a personal service company? 
Though the name may sound dubious, a personal service company (PSC) is merely a company through which a contractor operates in order to do their freelance work (because most businesses won’t hire a sole trader). The term isn’t defined in law – HMRC simply uses this label to describe companies that may be used as ‘cover’ by contractors who are really employees in all but name. 

This creates a double problem, affecting both contractors and the businesses that want to use them. If a business is afraid that any contractor it hires might be considered an employee by HMRC, it may not risk hiring them at all. In this case, both the business and the contractor lose out. This is what many small business fear will happen post-April 2021. 

Can I check my IR35 employment status? 
HMRC offers an online tool, Check Employment Status for Tax (CEST) that you can use to give yourself a general guide to your status. However, industry bodies (including IPSE, the Association of Independent Professionals and the Self-Employed) fear it is still not fit for purpose. Contractors, recruitment agencies and end-clients therefore shouldn’t rely on it wholly when determining IR35 status. 

The biggest problem with CEST: the MoO factor 
One of the key deficiencies of the CEST tool is that it does not factor in ‘Mutuality of Obligation’ (MoO). Mutuality of Obligation is one of the defining characteristics of employment, in that the employee has certain obligations towards the employer, and vice versa. Many of these obligations do not apply to contractors (e.g. the contractor can choose where and how to deliver the work, and can delegate it to an associate if necessary; while the client is not obliged to offer the contractor more work). MoO has been a decisive factor in a number of recent IR35 tribunals, which is another reason why the CEST tool is still only a rough guide. 

8 tips on how contractors and businesses can avoid IR35 

Fears that the changes to IR35 will spell the death of freelancing are exaggerated. By taking the appropriate steps, both contractors and businesses can ensure that they do not fall foul of IR35. 

Remember, IR35 is something that applies to a role, rather than an individual. So just because you were outside it on your last assignment, doesn’t mean that you won’t be inside it on your next one. For every assignment that you take on as a contractor, the most important thing is to be able to show that you are ‘in business on your own account’ and therefore not an employee. 

Tips for proving you are ‘in business on your own account’ 

If you are a contractor operating through a limited company (either your own or an umbrella company), HMRC may ask for evidence that you are genuinely freelance, and not just an employee of your client. Here are some ways that you could make your case. 

1. Highlight the ways your work situation differs from employees’ 

Genuine employees will have certain set working conditions, such as minimum hours, pension arrangements and other benefits, and perhaps subsidised services too. The employer also has a duty to provide work for them, which the employee has an obligation to do – and the employer can stipulate where and how the work is to be carried out. You should be able to show that little if any of this applies to you. 

2. Keep client correspondence 

If you have emails that clearly state you are not under the control of a manager at the business, but are simply contracted to provide a service, this can be useful too. 

3. Don’t name your company after yourself 

HMRC knows that a company named after a person may well be just that person, and this fits their profile of a PSC. But if your company has a more ‘business-like’ name, e.g. XYZ Design, it emphasises the fact that your company is distinct from you, and that you could delegate the work to another person if necessary. Employees cannot delegate in this way, so it marks you out as different. 

4. Have your own marketing materials 

You should be able to demonstrate that you market your contracting services actively. Have a listing on relevant services website, post adverts and print business cards, all of which help to indicate that you are in business on your own account. Never use a business card which includes your client’s branding! 

5. Maintain your own office 

A well-equipped office, even just in your own home, will strongly imply that your work activities extend well beyond your current client. If you also invest in your own software licences, trade literature and professional memberships, this can help a great deal too. 

6. Take out your own business insurance 

Having your own business insurance, such as professional indemnity insurance, is a great way of demonstrating that you’re not just an employee. 

7. Invest in your professional development 

Employees don’t pay for their own training, so if you pay for yours this will be another useful point of difference. Some professions may require you to take continued professional development (CPD) to remain qualified, so by paying for this you’re also reasserting your contractor status. 

8. Try to have multiple clients at the same time 

It’s not always possible to arrange, but if your time is split fairly evenly between two or more main clients, it’s much harder for HMRC to claim you’re an employee of any of them. However, having a very uneven split (e.g. 90 per cent of your income deriving from one client) may be less convincing. 

The more of these strands of evidence you can call upon, the more likely it is that HMRC will accept you are in business on your own account. Having just one or two on their own may not be enough. 

IR35 tips for businesses hiring contractors 

If your business hires contractors, either from time to time or on an ongoing basis, then you should review your relationships with them to ensure they don’t fall inside IR35. 

From April 2021 it will be your responsibility to determine whether a worker is an employee or a contractor for tax purposes. You will have to issue a Status Determination Statement to your contractors, which makes their IR35 status clear (inside or outside the rules) and explains why. As long as you support your decision with sufficient evidence and file the appropriate tax documents, you should avoid any penalties. 

In summary, you should: 

  1. Review all your relationships with contractors and/or consultants 
  1. Make sure your terms of engagement are clear and accurate 
  1. Provide contractors with their Status Determination Statement 
  1. Consider changing some contractors into employees if they fall within IR35 and if this is a more practical solution for you both 

Will I have to give my contractors employment rights? 

Some contractors who fall within IR35 and are treated as employees for tax purposes may feel they are entitled to full employment status, with all the protections that go with it. There are many potential issues that can arise from this, such as claims for backdated holiday pay, which will have to be addressed on a case-by-case basis. 

Ask your accountant to help you face up to IR35 with confidence. 

 

10 things to look for when choosing an accountant

10 things to look for when choosing an accountant

Accountant

10 things to look for when choosing an accountant.

 It is important to take your time when choosing an accountant. Now that so many businesses and people are working remotely, location isn’t so much of an issue – meaning you can look to hire the best talent to suit you and your business, wherever they are located.

Designated has been able to recruit a team of dedicated accountants that will best suit our clients, here are some of the qualities that we looked for:

Highly Organised

Accountants have a very busy role, with several deadlines throughout the month or quarter, they need to be aware of what is coming up when and who needs to be informed within the organisation. Any data or information must be collected in good time to avoid any last-minute scrambles.

Excellent Time Management

Going hand in hand with being highly organised, one of the top qualities needed by your accountant is excellent time management skills. With so many tasks that will quickly pile up if they are not seen to, your accountant must be able to assess how much time is needed to complete each task. For a senior accountant, there may also be elements of team management and meetings with the company’s leadership that can take up a lot of their valuable time.

Highly Experienced (within your sector) 

Being able to offer a wide range of skills can only come with many years of experience. Your new accountant should be able to offer a selection of testimonials and references backing up their work. Your accountant’s knowledge and experience need to extend to your particular area of business. While ideally, a prospective accountant may have dealt with many different types of industries it is recommendable that they have worked with yours so that they can hit the ground running.

Attention to detail 

Your accountant should be analytical, paying close attention to detail with the ability to spot errors quickly and efficiently. Your accountant should have the skills to be able to review and identify inconsistencies in large amounts of data or information. Attention to detail is necessary to ensure consistency and accuracy in financial reporting. This information can be used to help make crucial business decisions so it must be correct.

Honest and trustworthy 

Your accountant needs to have a strong sense of ethics. Integrity is a valued characteristic within an accountant, they must know right from wrong and always display integrity in their accounting and bookkeeping work. You need to be able to trust your accountant, you also need to know that if something goes wrong and if they make an error, they will be confident and honest enough to discuss this with you so that the mistake can be rectified.

Flexible

Your accountant may be analytical and structured but it is also important that they have a sense of flexibility in their work. Not everything is going to go to plan and they’re not going to always be able to gather the information that they need from a business owner or senior leader when they need it. Another reason why time management is important for this role. A high level of agility is also necessary for quick response to regulatory changes in the industry only then can they provide quality service to the business.

Up to date with the latest technology

If you’re searching for an accountant, you need to know and understand the latest technology that your prospective accountant can use. Designated is a Xero bronze partner and our finance team are all zero certified advisors trained by Xero to deliver you the best financial support. Xero is the perfect finance solution for most businesses providing a fully integrated suite of services, for example, Xero integrates with your bank account to enable easy reconciliations. 

 Up to date with ongoing training and certifications

If you’re searching for an accountant you must ensure they have maintained the proper certifications and are continuing their training and development within the industry. Thanks to the digital age, things are changing all the time, though it may not affect their workload right away, over time technology trends will continue to transform the accountancy industry.

Communication Skills 

Your accountant needs to possess excellent communication skills. They must be able to inform senior leadership of updates and changes in clear and easy to understand language. Accountants can impact critical business decision making, so they must be heard and understood. They may also need to collaborate with employees in different departments, with perhaps little financial experience, so explaining things in a way that will be understood. This leads us nicely onto our next point.

Collaboration

A good accountant can recognise their place within an organisation, make the most of networking and getting to know their colleagues. Accountants are team players and provide support to different departments in the organisation – that’s why they should be able to efficiently communicate the knowledge of their expertise to clients and decision-makers.

At Designated, we believe that a good accountant is needed throughout the year and not just at year-end to prepare your annual accounts and self-assessment. Your dedicated Designated accountant will do this and so much more.

  • Bookkeeping
  • Monthly management reports
  • Payroll
  • Accountancy
  • Strategic financial support

If you would like to know more about working with Designated’s accountancy team, please don’t hesitate to get in touch with Michelle for a friendly chat: michelle.elliott@designatedgroup.com

Accountancy vs Bookkeeping

Accountancy vs Bookkeeping

Accountancy vs Bookkeeping

 

For somebody who doesn’t work in finance, it can be difficult to distinguish the difference between accounting and bookkeeping, as there are some administrative areas that can overlap depending on the structure of a business and how many employees it has working in its finance department.

However, while bookkeepers and accountants share common goals, they do support your business in different stages of the financial cycle.

Bookkeeping is more administrative, recording financial transactions. Accounting is more subjective, giving you insights into your business’s financial health based on the information provided by bookkeepers.

If you’ve ever wanted a clear definition between accountancy and bookkeeping, keep reading.

What is a Bookkeeper?

Bookkeeping is a legal requirement for all businesses of any size to carry out, and it refers to the recording of the financial transactions of a business, whether a sole trader, a partnership, or a limited company.

A bookkeeper will record all transactions either manually or within an ERP system like XERO and keep copies of all invoices, receipts and evidence of these incomings and outgoings.

The role of a bookkeeper will include:

  • Recording financial transactions
  • Posting debits and credits
  • Producing invoices
  • Preparation of financial statements (balance sheet, cash flow statement, and income statement)
  • Maintaining and balancing subsidiaries, general ledgers, and historical accounts
  • Completing payroll

What is an Accountant?

An accountant has expert knowledge surrounding taxes and accountancy. A business needs to consider more than just the in’s and out’s calculated by a bookkeeper, the right accountant will guide and act as financial business partner, ensuring all allowable expenses are claimed and all decisions are tax efficient to not only the business but the owners, directors, and partners.

The role of an Accountant will include:

  • Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process)
  • Reviewing company financial statements
  • Analyzing costs of operations
  • Completing income tax returns
  • Aiding the business owner in understanding the impact of financial decisions

Designated Accountancy Services

All business owners want to have complete control of their business finances and have an up-to-date view of their financial performance. Our team of Designated accountants are experts who work with you on a flexible basis, whether you need support one day a month, one day each week or more.

Designated is a Xero Bronze Partner and our finance team are Xero certified advisors, trained by Xero to deliver you the best financial support.

Do you wish you had answers to questions like these?

  • How much tax will I need to pay next year?
  • How much profit did we make last month?
  • What do you mean by Tax Digital?
  • Am I managing payroll in the most effective way?

If so, then our Accountancy services may be your solution. Read about all our services in our Accountancy brochure.

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