As a sole trader contractor, you may have come across the term IR35. It`s a relatively new legislation that was introduced in the UK in 2000 aimed at preventing tax avoidance by workers who operate through intermediaries, such as limited companies. In this article, we take a closer look at what IR35 means for sole trader contractors and how you can ensure compliance with this legislation.
What is IR35?
IR35, or the “intermediaries legislation”, is a set of rules introduced by HM Revenue & Customs (HMRC) to identify workers who are effectively employees of a company but who operate through an intermediary, such as a limited company or a personal service company (PSC). These workers are also known as “disguised employees” as they may be providing services to a company in the same way as an employee but without the same employment rights and benefits.
IR35 applies to workers who provide services to a company through an intermediary and who would be classified as employees if they were engaged directly by the company. If you fall under this category, you will be subject to the same tax and National Insurance contributions as an employee.
How does IR35 affect sole trader contractors?
Sole traders are individuals who are self-employed and run their own businesses. They are not affected by IR35 as they do not operate through an intermediary. However, if you operate as a sole trader but provide services to a company through a limited company or a PSC, you may be subject to IR35.
If you are a sole trader contractor and you provide services to a company through a PSC or a limited company, you must ensure that you are not classified as a “disguised employee”. This means that you must be able to demonstrate that you are running a genuine business and that you are not operating as an employee of the company.
To ensure that you are not subject to IR35, you should:
1. Provide evidence that you are running a genuine business by having a business plan, a website, and a business bank account.
2. Ensure that you are not under the supervision, direction, or control of the company you are providing services to.
3. Have multiple clients and contracts to show that you are not exclusively working for one company.
4. Have control over your working hours and your working location.
5. Provide your own equipment and tools to complete the work.
6. Have the right to provide a substitute to complete the work on your behalf.
By demonstrating that you are running a genuine business and that you are not operating under the control and direction of the company you are providing services to, you will avoid being classified as a “disguised employee” and being subject to IR35.
Conclusion
If you are a sole trader contractor who provides services to a company through a PSC or a limited company, you must ensure that you are not classified as a “disguised employee” and subject to IR35. By providing evidence that you are running a genuine business and that you are not under the supervision, direction, or control of the company, you can ensure compliance with this legislation. It is important to seek professional advice to ensure that you are fully aware of your obligations as a sole trader contractor.