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SMEs need to gain more familiarity with IR35

Small and medium-sized businesses need to gain greater familiarity with ‘disguised employment’ rules before deciding to take on more contractors in an effort to control their costs, in order to avoid getting into a mess with Her Majesty’s Revenue & Customs.

Awarding projects to freelancers and contractors can be a serious boon to an SME’s bottom line because temporary workers are quite often more cost-effective than hiring additional permanent workers. The flexibility of freelancers means that SMEs need only employ them when needed, leading to smaller expenditures on payroll, but there’s a fly in the ointment: SMEs need to make sure they’re not just calling their employees “freelancers” and “contractors” to avoid paying as much in taxes.

SMEs stand to save in excess of £2 billion due to not having to provide holiday pay, sick pay, or make national insurance payments. However, with IR35 rules put in place, SMEs and contractors alike can get into serious trouble with the taxman if they’re using a contract working relationship to hide the fact that the contractor is really just an employee with a fig leaf.

HMRC says that disguised employment is nothing but tax avoidance, especially in instances where nothing has changed between an employee and an employer except for tax liabilities. The subject can be vastly complex, and sometimes it’s difficult for SME owners to completely grasp the issues, so it’s recommended that any SME that wants to use contractors instead of permanent employees should find a qualified accountant with experience in dealing with the vagaries of IR35 and other contractor-specific taxation issues.

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