Since it became law in 2000, IR35 has been a thorn in the side of independent contractors in the UK. Controversial, infuriating, confusing, and, some would argue, ineffective; the legislation has long provided a focal point of heated debate for the small business community.

For those in the dark, here’s an easy-to-follow guide to IR35…

In the beginning

In April 2000, the then Labour government introduced a piece of legislation which had the aim of closing a tax loophole. Quite simply, employees working under a traditional business structure (on a PAYE scheme) could potentially go home on a weekend and then come back on the Monday suddenly transformed into a contractor for tax purposes yet still doing exactly the same job, exactly the same way. That person would then be taking advantage of the lower rate of tax.

In essence, this person would be a ‘disguised employee.’

IR35 would tackle this scenario by putting the onus on a contractor to prove that they weren’t a disguised employee. So, all of a sudden legitimate contractors had to become very wary that all of their contracts were IR35 compliant and go out of their way to prove it.

The backlash

The Professional Contractors Group (PCG) was swiftly launched to stand up for the rights of freelancers and contractors. The founders understood that their own business ambitions would have been seriously hampered if the legislation had been established while they themselves were budding entrepreneurs.

Rather than simply close an exploited tax loophole, it was argued that the legislation would hinder small businesses and the UK’s entrepreneurial spirit.

Despite the consternation it has caused, IR35 has proved to be largely ineffective and has raised very little revenue for the government.

How to ensure you remain ‘IR35 friendly’

One of the main issues for contractors is that IR35 doesn’t offer the clearest parameters of what constitutes being IR35 compliant and what constitutes being a disguised employee. However, HMRC does provide a very useful list of questions to help you draw a conclusion.

If you have any doubts, try answering the following:

* Do you work set hours, or a given number of hours a week or a month?

* Do you have to do the work yourself rather than hire someone else to do the work for you?

* Can someone tell you at any time what to do, when to work or how to do the work?

* Are you paid by the hour, week or month?

* Can you get overtime pay?

* Do you work at the premises of the person you work for, or at a place or places he or she decides?

* Do you generally work for one client at a time, rather than having a number of contracts?

If you answered YES to most of these then you are most likely an employee.

And if you’re still shrouded in doubt, try these:

* Do you have the final say in how you do the work for the client?

* Can you make a loss on the contract?

* Do you have to provide the main items of equipment you need to do the job for the client, not just the small tools many employees provide for themselves?

* Are you free to hire other people on your own terms to do the work you have taken on?

* If you are free to hire other people on your own terms, do you pay them out of your own pocket?

* Do you have to correct unsatisfactory work in your own time and at your own expense?

* Do you have a number of clients at the same time?

If you answered yes to these then the chances are you’re okay.

Paying the penalty

If you fall foul of IR35 then HMRC will look to recoup all the tax you have avoided whilst working illegally as a contractor. There may also be interest to pay or a penalty as a result of any investigation. The penalty can be severe for anyone who’s been contracting over a long period when they should have been on a PAYE scheme.

What lies ahead for IR35?

The coalition government established the Office of Tax Simplification to review IR35 and look into possible alternatives. Many people feel that the days of IR35 are numbered, but there are no guarantees. Besides, the legislation exists for a legitimate reason and so if it is repealed it will have to be replaced with an alternative.

And replacing it effectively won’t be easy. A hasty attempt to do so may end up being even more bungled than IR35. Simplifying tax is never simple and the process is likely to take some time.

Crunch online accounting provides a team of expert accountants for every one of our customers. Our accreditation with the PCG proves that our accountants are fully qualified to handle IR35. To get in touch call 0333 311 8000 or email info@crunch.co.uk