How IR35 Assessments Save You Thousands

If you’re a freelancer or contractor in the UK, IR35 is not some other tax law that you can simply ignore. If you get your IR35 status incorrectly, it can end up costing you thousands of pounds. Here’s the thing – doing a proper IR35 test can help save your income and give you one less thing to worry about.

What Is IR35, Really?

IR35, or the Intermediaries Legislation, is the set of rules used to assess whether you are actually self-employed or simply a “disguised employee.” If you are found by HMRC to be operating inside IR35, you will pay income tax and national insurance contributions as an employee, although you will forgo the rights granted to employees, including paid sick leave.

The difference in finances can be very big. A person who earns £60,000 per year and operates outside of IR35 will take home approximately £48,000 a year. When inside IR35, the person will take home approximately £41,000 a year. This equates to a difference of £7,000 per year, which will increase with higher earnings.

The Cost of Getting It Wrong

In many cases, contractors may presume they are working outside of IR35 without actually carrying out a proper assessment of their circumstances. It is at this level where a great risk exists. HMRC sees fit to challenge IR35 assessments with a great deal of aggressiveness, and the possible consequences of finding yourself to be operating within IR35 are very severe indeed.

If HMRC conclude that you are liable, you could owe tax going back for up to six years for being within IR35. Using a consultancy deal of £60,000 a year, this could amount to a liability for further tax of over £40,000 with interest and possibly a further penalty of up to 100% of that tax liability for deliberate non-compliance.

But that is not all – even if you have already paid this money, then you still owe it. Many contractors have found themselves broke because of unexpected IR35 payments.

How a Professional Evaluation Helps to Protect You

A full IR35 test will use HMRC’s three main criteria to evaluate your specific arrangements like control, substitution and mutuality of obligation. A full IR35 test is necessary to understand how HMRC’s criteria may impact your specific situation.

Now we come to where the money saving begins. It is where a proper analysis reveals you absolutely either not inside or outside of IR35 for a given contract. Being outside? Well, you can then arrange your finances accordingly.

Being inside? Job done.

Use PAYE right from the start.

Additionally, professional assessments also offer evidence of your status. In instances where you are questioned about your status by HMRC, professional assessments can be crucial evidence that can help you win your case quickly, rather than going through a lengthy and costly process.

Hidden Cost-Savings Beyond Tax

Additionally, aside from the clear cost savings, a proper IR35 assessment offers benefits to contractors beyond their consideration.

Client relationships also enhance with you having the capability to communicate your IR35 status with certainty. With the responsibility of determining IR35 status now in the hands of medium and large clients since the 2021 reforms, you may find clients are nervous about hiring you. An analysis by a professional allows you to appear less risky.

Bargaining power also strengthens if a contractor knows his or her true status. If the test indicates that the individual is definitely outside IR35, he or she can negotiate a higher payment scheme since he or she will take home most of the cash. Freelancers with a clear IR35 evaluation tend to command a 10-15% higher payment scheme compared to those whose evaluation is not clear.

Insurance premiums reduce when there are accurate assessments. Professional indemnity and IR35 insurance premiums will normally be lower if a contractor can show that they have made reasonable efforts to arrive at a correct determination.

Your mental resources become liberated because you do not have that cloud hanging over your head that concerns your overall tax situation. This worry does come with real, tangible expenses, both in terms of lost productivity and lost overall happiness.

When Should You Get Tested?

So, the simple answer is before you begin any new contract. YourIR35 status is not personal to you. It’s for every single individual circumstance. You can be outsideIR35 for one client and insideIR35 for another at the same time.

You should also be reassessed whenever there are very significant changes in the terms of your contract, you extend on a long-term basis and there are changes in how you work. What was true about you two years ago may no longer apply.

Contractors can really benefit from having a review done for them each year on all their contracts and more so if they have multiple clients in a given year. This is the best demonstration that they have exercised due diligence on their part to HMRC.

The Bottom Line An IR35 test is not an outlay, but an investment in safeguarding your earnings. Whether the test concludes that you are working outside the realm of IR35 and are thus free to claim the largest possible paycheck, or whether the findings indicate the change you must implement before the tax authority begins its pursuit, the end benefit will surely outstrip the expenditure.