Introduced in 2000, IR35 is a piece of tax legislation that all contractors need to consider and affects all contractors who do not meet HMRC's definition of 'self employment'. The legislation means the Inland Revenue can tax some contractors as though they are employees of their clients and was introduced in order to tackle tax and National Insurance avoidance schemes through the use of intermediaries such as Personal Service Companies.
Not every contractor is caught by IR35 and determining whether you are inside or outside IR35 depends on a variety of factors, such as the terms and conditions of the contract or the contractor's working arrangements. A contractor caught by IR35 will typically receive 20% less pay each month than one that falls outside IR35.
Find out more information about IR35.
It is important to have necessary insurance in place before starting any assignment. Working for yourself carries a number of responsibilities and obligations and having a professional indemnity policy in place can help protect you financially if you face a negligence claim whilst at work. You may need a professional indemnity insurance policy if you:
- Provide advice to your clients
- Handle or work with data that belongs to a client
- Have responsibility for a client's intellectual property
- Provide a professional service and could be challenged on the work you do
You will need to register for VAT once your annual turnover reached a certain amount and in doing so you can potentially say a significant amount of money. If your limited company's gross income exceeds £77,000 per year (VAT threshold) you must register for VAT or risk being fined.
The flat rate scheme is typically recommended for contract professionals as it can reduce the administrative burden and, in some cases, mean you end up with a cash surplus.
If your limited company turns over less than £150,000, excluding VAT, in any financial year then you are eligible for the scheme. Once in the scheme you won't be made to leave until your VAT inclusive turnover exceeds £230,000.
The scheme means contractors can charge clients the normal 20% VAT, but they pay HMRC a percentage of turnover rather than working out VAT on all purchases when they come to reconcile their VAT.
Agency Workers Regulations (AWR)
The legislation impacts upon interims using an umbrella company but tends not to affect those working through their own limited company. The directive was introduced to protect the working and employment conditions of contractors, temporary workers and freelancers and had a wide range of implications for the staffing sector and its supply chain.
You are classed as an 'agency worker' if your work through a temporary work agency (e.g. umbrella company) on a temporary bases. Provided the practices of limited company contractors do not put them inside IR35, they will not be affected by AWR.
AWR entitles interims access to the company's available facilities (canteen, gym membership childcare facilities etc) and information on suitable job vacancies from tday one of their assignment.
After 12 weeks in the same assignment the temporary worker becomes entitled to the same pay (holiday pay, bonuses, commission etc) and working conditions (annual leave, rest breaks, working time) as a permanent employee in a comparable position. There are some conditions regarding what constitutes pay for a temporary worker and full details surround AWR can be found here.
Return to our contractor information page.