Being caught by IR35 can be a blow, but it isn’t the end of the world. You can easily bounce back and continue to work as a contractor with no problems; here’s how.
So, you’ve got yourself a new contracting job, and it looks like a good one. It pays well, it’s work you are good at and enjoy, and it looks set to make you financially stable for the foreseeable future. Just when you are looking forward to it, you get the bad news: you’ve been caught by IR35!
The controversial legislation is the bane of many a contractor’s life, and falling foul of IR35 can be quite a blow. It won’t stop you getting on with the work, but it will mean you are taxed much more than you were expecting, which can seriously affect your take-home pay. However, it doesn’t spell the end of your contracting career and in fact it is often a good learning curve enabling you to make changes to the way you operate and aid with you being seen as a true independent contractor on future assignments.
You might have heard horror stories of limited companies being caught by IR35 and having to close down, but these occurrences are rare and only happen under certain specific circumstances. In actuality, being caught by IR35 does not mean you will have to stop working through your own Limited Company, unless you want to, of course. Here are the steps you should take after being captured by IR35 in order to avoid being negatively affected:
Arrange your review as soon as possible
This is a bit of a pre-emptive step you should take as standard practice whenever you take on a new contract. Never leave your IR35 review until the last minute; it should be done as soon as possible, otherwise you can end up with a large tax bill that can cause major problems.
For example, let’s say you only undergo an IR35 review after a year of working for a client, and you fail. This would mean that you would be eligible to pay the excess tax and National Insurance contributions for the entire year; even if it’s only an extra £100 a month, that would add up to a £1,200 bill.
If some of that tax should have been paid during the previous tax year, then you will face charges for being late. You might also need to pay interest on the amount owed, depending on how long you have been working without an IR35 review. It’s important, therefore, to undergo a review as early as possible, and hold follow-up reviews regularly in case anything changes.
As a Brookson customer, Brookson Legal Services can review your contract before the assignment has commenced, setting you off on the right track, we will then review your working practices once you have commenced work and every 6 months, whilst an assignment is ongoing. All this is free of charge to Brookson customers.
By having a review, Brookson Legal Services can highlight any problematic areas which you can act upon before taking any future assignment, therefore making it more likely future assignments will fall outside of IR35.
Consider an umbrella company
If an assignment is caught by IR35, you will be taxed to a similar degree as an employee. However, if you’re running your own limited company, you will still have to complete all your admin and take care of your finances, and you won’t be entitled to the benefits of being a full-time employee.
If you fall under these circumstances, it might be worth considering working through an umbrella company. The umbrella company will act as your employer, paying you your earnings after deducting your tax for you. This means you will have much less admin to do, freeing up your time to potentially find and take on more paid work to increase your overall earnings.
Umbrella Companies are very flexible enabling you to quite easily switch back to your limited company when you secure an assignment that is Outside IR35. However, chopping and changing the way you operate on a regular basis should be avoided as to not highlight yourself to HMRC.
Remember it isn’t a life sentence
Of course, you might not want to work through an umbrella organisation, especially if you’ve already put effort into creating your own limited company. If this is the case, then don’t worry; being caught by IR35 on one assignment doesn’t mean you will be caught on all assignments.
There are plenty of benefits of working through a limited company other than the tax. For example, you will still be able to put business expenses through your firm, even after failing an IR35 review. This will help you increase your overall take-home pay. It’s not something you will necessarily want to give up.
By having Brookson Legal Services undertake an IR35 Status Review, they can work with you so you understand why you fall within IR35 enabling you to demonstrate that you fall outside of IR35 on any future assignment. Brookson Legal Services are on hand to offer unlimited IR35 reviews and advice to all Brookson customers.
If you aren’t sure if you fall under IR35, or want to explore the options of working through an umbrella company, you can always talk to Brookson. We are specialists in self-employed issues, and we have plenty of free downloadable guides on a range of relevant topics. See what we have to say about IR35 here.