Categorized | ir35 rules

Contractors – Do you know your business?

Contractors – Do you know your business?

I was reading the various contractor-related bulletin boards over the weekend (as you do…) and I was struck yet again by the number of people in this game who don’t really understand  the business they’re in.

There’s a lot to understand and nobody expects you to be a combination of chartered accountant, tax barrister and employment law expert, but some idea of the basics would be good.

Open your eyes

It’s not like there isn’t plenty of information out there. I’ve long been a fan of the PCG’s free Guide to Freelancing but there are plenty of others out there on the end of a Google search. However, the key bits that keep coming up are IR35 (gosh!), expenses and opting in or out of the Agency Regulations. I thought a brief overview now might be useful..

IR35

IR35 is a total mystery. I’ve been looking into it for ten years and I still don’t have a clue how anyone is supposed to know if they’re in or out: not only is it incredibly wooly, the rules change on almost every case that comes to court. It hinges on three factors – Direction and Control (which is imperfectly defined), Mutuality of Obligation (very basically, does the client have to provide work or pay you if there is none to do) and a Right of Substitution (can you send someone else to do the work).  Minimal D&C, minimal MOO or a definite ROS will theoretically put you outside IR35, but you’ll need an expert to prove it. Equally importantly, these actually have to be in place, not just covered in the contractual wording: cases have been lost when contract clauses have been shown to be unsupported by the client.

Contractor Expenses

Expenses are dead simple. If you spend money that is wholly and exclusively for the execution of your business, then it’s allowable against your personal taxation. If they aren’t, you can still claim them but you pay tax as though they were straight earned income. So travel to work is fine but a 48? plasma screen monitor for the PC isn’t. Nor, oddly enough, is training unless it is directly related to the job you are currently doing. Needless to say there is room for interpretation about “directly related”, but that needs professional advice.

2003 Agency Regulations

The Opt Out causes enormous confusion. The Agency Regulations are there to protect vulnerable temporary staff from exploitation. Sadly they are written so virtually any freelance working through an agency is in scope, so you have the option to say you don’t want them to apply to any given engagement. The thing is, you can’t opt out if the client knows who you are (i.e., you’ve been introduced to them) so most people are opted in regardless. Whether or not that’s a good thing is up for debate; there are some slight commercial benefits, but you’re likely to have a worse contract in IR35 terms. The agencies want you to opt out because it saves them a lot of work, of course.

To summarise

As I said at the beginning, the average freelancer needs a whole gamut of skills if they are going to be certain they fully understand their position and responsibilities. They need to be fairly certain of their position with respect to IR35, if only because you have to make an informed assessment of your tax position if you are to avoid penalties if HMRC manage to prove you wrong. You’ll already be paying a big lump of extra tax plus interest; penalties would be the icing on the cake. So make sure your accountant properly understands IR35 as well as the more usual financial issues; it can make a big difference.

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Image: I’m starting to crack by 1happysnapper

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