Newbie - About to start off as a contractor but I might be in the IR35?

[innocuousm]

Hello,

Apologies if this is truly a simple question, I have spent hours looking on the site but I'm still not 100% sure what to do, so thank you for reading.

I've been on a full-time permanent contract all my adult life (so 8 years) but I'm about to make the jump to becoming a contractor in April.

I'll be working from home in the UK but the contract is with a foreign company (and I don't work in the IT sector, it's a digital consultancy "project") and I'll be receiving a steady monthly payment for my services for 12 months. Any travel expenses I may have I'll be invoicing to my client. There will be very few - if not any - other expenses, so I expect my bookkeeping to be straightforward.

This is where I get stuck, from everything I've read, despite my relatively simple situation, it seems that if I did set up an ltd I would only be doing so for tax purposes (to gain more through dividends). However, my contract, from the looks of things, falls under IR35. So that risk, coupled with accounting fees throughout the year that come with an ltd, make it seem like a risk not worth taking.

So it feels like I should in fact file as a sole trader with a separate bank account, the extra tax on my profits seems worth it considering the IR35 risks involved. It also protects me in case I lose the contract (and will then most likely return to permanent employment).

I hope this makes sense, this forum seems like the best place to ask so thank you for taking the time to reply.

[MyUserName]

Send your contract to a professional review company. If they say it is outside IR35 and you verify with your client that the working practices will be as specified in the contract go for a Ltd.

[DirtyDog]

This is where I get stuck, from everything I've read, despite my relatively simple situation, it seems that if I did set up an ltd I would only be doing so for tax purposes (to gain more through dividends). However, my contract, from the looks of things, falls under IR35. So that risk, coupled with accounting fees throughout the year that come with an ltd, make it seem like a risk not worth taking.

Where is the risk? Get the contract reviewed, get the reality of the situation checked. If you are outside IR35 then go for it that way; if you aren't then go inside. Make sure you have insurance, just in case.

So it feels like I should in fact file as a sole trader with a separate bank account, the extra tax on my profits seems worth it considering the IR35 risks involved. It also protects me in case I lose the contract (and will then most likely return to permanent employment).

Are the client willing to deal with you as a sole trader? If they aren't, then it's a moot point - many will only deal with a Ltd company (either your own or an umbrella). I'm not sure how being a sole trader protects you from anything, though.

[TheCyclingProgrammer]

Does your contract give you an unfettered right to substitute?
Will you have a significant degree of control over how and when the work is done?
Is your client obliged to provide you with work or continue paying you when there is no work to do?

If you can answer yes to either of the first two, or no to the last, and your contract is solid, there's a good chance you won't be caught by IR35.

[Platypus]

I would have thought that doing the work for a foreign company is significant here. It seems to me that if they have no UK presence, the chance of you being deemed a disguised employee are nil, therefore you don't need the protection (insulation) that a limited company offers, therefore sole trader is a viable option, and IR35 becomes irrelevant.

Anyone else have a view on this?

To the OP, I should stress that this is speculation on my part, it's not fact or advice.

But I for one am very interested to hear what people think !

[BlasterBates]

Agree with Platypus. I don't see how anyone billing a foreign company which has no presence in the UK could ever be caught under IR35, given the fact that it would be impossible to be employed by them. Maybe theoretically, but then they can't interview anyone so they would have to accept your word.

[Wanderer]

Does your contract give you an unfettered right to substitute?
Will you have a significant degree of control over how and when the work is done?
Is your client obliged to provide you with work or continue paying you when there is no work to do?

If you can answer yes to either of the first two, or no to the last, and your contract is solid, there's a good chance you won't be caught by IR35.

Good answer. To expand a bit on those points:

The right of substitution could also mean the right to subcontract all or part of the work. If this is feasible then you have a stronger case for avoiding IR35.

As Platypus says, the direction and control is potentially fairly limited if you work from home for a company in another country. Innocuousm, you need to consider if you will be given a job to do and go away to do it then present the finished product to the client (pointer to outside IR35) OR would the client have a day to day direction and control over how, when and where you work (pointer to IR35 caught)?

There is a certain amount of admin to running your own company but with a decent accountant this isn't too much of a problem.

You should contact one of the companies who do IR35 reviews and give them a copy of the contract to review. Also discuss your working practices with the potential client and see if you can steer the relationship towards a business to business arrangement rather than one of an employee.

Contracting is quite different to being a permie, have a read of Noobie Contractor Mistakes and make sure you understand what you are getting into!

Good luck!

[malvolio]

Agree with Platypus. I don't see how anyone billing a foreign company which has no presence in the UK could ever be caught under IR35, given the fact that it would be impossible to be employed by them. Maybe theoretically, but then they can't interview anyone so they would have to accept your word.

IR35 is not about employment, it's about tax! All HMRC are interested in is taxing you as an employee, the rest of the relationship is irrelevant. Their test is "is the relationship between worker and the people paying him anything like that of a permanent employee?", nothing else .

[jamesbrown]

I would have thought that doing the work for a foreign company is significant here. It seems to me that if they have no UK presence, the chance of you being deemed a disguised employee are nil, therefore you don't need the protection (insulation) that a limited company offers, therefore sole trader is a viable option, and IR35 becomes irrelevant.

Anyone else have a view on this?

To the OP, I should stress that this is speculation on my part, it's not fact or advice.

But I for one am very interested to hear what people think !

Surely the main protection conferred by a Ltd is limited liability? Insurance doesn't offer complete protection.

In terms of IR35, the rules are exactly the same. This may be a technical point, but the relationship that HMRC seeks to demonstrate is based on a hypothetical test. Realities beyond those in the test (as developed through case law) cannot be central to it. Indeed, practically speaking, it may be impossible to be an actual employee of the end client for visa reasons or whatever, but one might nevertheless act like an employee in the context of the hypothetical test in place and, therefore, be deemed one according to those rules.

I do agree with BB that it may be more difficult, in practice, to collect evidence, but not impossible. Ultimately, there's nothing stopping them picking up the phone and collecting some pretty damning evidence if the person on the other end is feeling chatty. Thus, my advice would be to treat it like any other contract and ensure, as far as possible, that the contract and working practices clearly demonstrate a b2b relationship.

To the OP, don't make any assumptions. Have the contract evaluated. You're halfway to lack of D&C if you control where and when. You could also consider an Umbrella, of course, if you don't want the hassle or expect anything beyond this. Rule-of-thumb is >~30k of income to make a Ltd worthwhile financially, but it's not all about the finances by any means. Sole trader would also be a good option, in principle, with appropriate insurance in place (you'll have to look into this carefully, though, and you may struggle if the jurisdiction and governing law for the engagement is not England), but you won't have the protection of limited liability.

[LisaContractorUmbrella]

Agree with Platypus and BB - if OP is working from home for a company based overseas there can be no SD&C so I can't see how there can be an IR35 issue