I have been outside the UK for more than 8 years but I still get approached by UK recruiters offering contracting gigs. 7 out of 10 of them always write "Outside IR35" and I never really grasped what it meant exactly, can any UK contractors ELI5?
The IR35 law was supposed to stop them losing tax revenue, and to be honest i even agree with the overall law, they just executed it incorrectly. They put the responsiblity on the company offering the contract, when it should be on the person applying for the contract that has the responsibility to show they're a business and not a disguised employee.
The better way to do it in my opinion is to empower HMRC with more resources to question contractors and show that they are actual businesses and not tax dodging employees.
If you're acting as a contractor then you are specifically not an employee and you shouldn't let anyone at your client refer to you as such or try to control how you work except via the terms of your contract.
That means for example, you ask to take leave. You tell them that you are not available on certain days. It a subtle but very important difference.
That's not true. If you pay yourself from your company whether it is dividends or salary, you pay tax as everyone else. Sure if you decide to retain some money in your company, you only pay corporation tax, but as soon as you decide to pay the remainder yourself you will pay personal tax anyway. That's how any business works!
It's completely pointless to do anything about this. Big consulting corporations do exactly the same thing, but are not being hounded by HMR.
> whether it is dividends or salary
Dividends won't incur NI thus significantly reducing the tax impact.
Then there's all the other expenses of running a business such as accountancy fees, public liability and on going indemnity insurance premiums and business banking fees that an employee won't have to pay on their salary.
What dividends escape is Employers NI and that's where contractors make a gain
Coupled with the ability to have a spouse as a director or shareholder and so income split with them
"Outside" could mean one of two things, the company you're contracting for doesn't qualify to determine your status (and the tax burden if investigated is on you, if you deem yourself "outside") or they have provided a statement outlining why the role is truly considered outside IR35 (https://www.gov.uk/guidance/check-employment-status-for-tax). For the latter, any incorrect determination is on them.
In reality, the actual difference is marginal, and in return contractors forfeit every protection taken for granted by permanent employees. Paid leave, sick pay, redundancy pay, protection from indiscriminate firing, (often generous) pension contributions etc.
These folk express is quite well
Only thing that matters from the IR35 perspective is whether the service needs to be performed by a specific person in the business. All the rest is irrelevant. If the work is personal, then it is in scope.
Risk averse companies can declare contract in scope by simply fettering substitution clauses or not having them at all.
It doesn't matter if business providing service is legitimate or not.
Those weren't small agencies either. They were some of the biggest names in the business. And they would do other questionable things as well, like not sending the real legal documents until the last minute so any challenge would risk losing the contract, or having their agents and sometimes even their lawyers just straight-up lie about what the terms meant or what the implications were. And of course they would often claim they've used the same contract many times before and mysteriously no-one has ever challenged terms that would spook any contractor who'd ever taken real legal advice in this area.
It's as if they think introducing an obviously-never-going-to-be-used substitution clause is a get-out-of-jail-free card for IR35. Meanwhile some of these "outside IR35" roles require hybrid working where the contractor's time and place of work are controlled, pay based on time and use a rolling contract, have no fixed scope or detailed specification of services to be provided, etc.
There seems to have been much more of that since the reforms that are now being wound back and I've never really understood why. Maybe a lot of contractors were OK with risking it if it meant they could avoid the umbrella trap or something. Seems like a good thing if those not-really-outside roles will now get more resistance because contractors who will be on the hook for IR35 again or the insurance companies they use to protect themselves won't accept those kinds of conditions any more.
If you read HMRC guidances, ultimately if they want someone get done for IR35 (as in committed for years long court saga and bankrupted), then they can always claim the contract clauses for substitution, no control etc were specifically to avoid paying tax.
They have so many rules about substitution, it almost impossible to adhere. For instance, let's say you have a 3 months contract and you never had to use substitute - for them it's a sign, that it was a personal service. If you used a substitute - they can claim you used it to legitimise tax avoidance. Let's say that argument fails - they'll ask if substitute was doing exactly the same work - if you did some coding, got ill and sent a substitute and you were back to work before they could get up to speed, it does not count as legitimate.
Another card up HMRC sleeve is that they can ask if the client could hire the substitute directly, e.g. if you used your colleague how was a contractor and available at the time. If the client could get that person themselves while you were ill, then it does not count.
If you sent a contractor that previously worked with the client, this in the eyes of HMRC also does not count.
There is many many more rules like this and this is designed to exhaust the contractor accused of avoidance.
To be nailed for control is also easy. If you work at the client's 9 to 5 because these are also your business hours and it is convenient to be at client's office, but you didn't have it written in the contract, the HMRC may claim a "hypothetical contract" where in fact you were controlled. Or if you worked I don't know 10 to 6 at your home or office. The HMRC can claim that you arranged it that way to try to avoid paying tax.
You can't win if they put a mark on you.
It's not that "you can't win" because of course many people have beaten HMRC in IR35 cases once their case was finally properly decided. The big three criteria that are famously used to suggest a contract is outside IR35 (substitution, SDC and mutuality of obligation) don't come from the legislation but from early cases that HMRC lost. But it might be a rather Pyrrhic victory if you've still spent years of your life stressing about the case before it gets to that point.
To have truly outside IR35 contract, things to look for are: - can you provide a substitute? (for instance if you get ill, can you send someone else to do the work - and you pay them, not the client) (no personal service)
You should be able to send someone else, that way the service is not personal. So the contract should be with your company, not with yourself.
- can client decide how, where and what time you do the work? (control)
You should be able to decide your own working hours, where you work and how. That of course does not mean you can't decide to work at client's office during their working hours.
- are you obliged to accept the work and is client obliged to provide work? (mutuality of obligation)
This is also important - you should be able to refuse to take on the work. Ideally that should be reflected in notice periods - good outside IR35 contract would have zero notice on both sides. You should be able to walk away from the job without consequences.