IR35 is a tax legislation that is created to tackle tax avoidance by workers supplying services to clients through a Limited Company. IR35 can reduce the worker’s net income by up to 25%. If caught, you will pay Income Tax and NIC (National Insurance Contributions). If you are a contractor in a Limited Company, you are entitled to receive payment in the form of dividends.
The challenge here is to prove that you are outside IR35. With this, you have to obtain and maintain certain records to prove that you are outside IR35 because anytime, HMRC (Her Majesty’s Revenue and Customs) can question your status. You will be faced with a tax inspector who will examine your evidence. It is important that at the onset you already know your IR35 standing. Here are some ways to prove that you are outside IR35:
Know your status
Contractors are considered outside IR35 while employees are considered inside IR35. You have to prove that you are a contractor and not an employee of a company or organization. An employee refers to a person who performs work at the same office every day and executes a whole range of tasks at the discretion of the employer.
A contractor refers to a person who provides a particular service for a given fee. Contractors are given the freedom to make their own decisions. They work but not necessarily at the offices of the company on their own time and at their own expense.
Bring your own equipment
If you are a true contractor, you are outside IR35. However, you need to prepare for other proof. You should bring your own equipment while working. For employees, the company will provide equipment to support their work. For contractors, they must bring their own equipment. It will serve as a proof. To fortify this, you should send emails showing that you are using the equipment.
Work at home
You can ask your project manager to allow you to do some work at home. You should also email records showing that you worked at home. You have to remember that under IR35, the right of substitution is an important proof of being outside. If you decide to outsource, you should pay the substitute and the client should be aware that it is happening.
Pay your own expenses
Contractors pay their own expenses. You have to keep proof that you are doing it. You can consider receipts and other materials needed from the client. If you can, document things through email so you can retrieve it easily when the need arises.
It is important that you prove you are outside IR35. As a contractor, you need to evaluate the IR35 status of every contract before you sign it. You have to be ready because the HMRC will look for evidence to prove that you are inside IR35. You can start with contractors calculator. Give importance to collecting proof because HMRC can go back six years before if it decides to review your status. If they win, you will pay a hefty amount for the fines and the remaining taxes.