IR35 and Freelance Contractors Across Scotland

Q. What is IR35 and how will it affect me?

A. The prime aim of the ‘IR35′ rules, which became law via Schedule 12 of the Finance Act 2000, was to ensure that people working via limited companies would be subject to the same levels of tax as ‘normal employees’, when the limited company worker was performing the same work, in the same manner as the employee.

The legislation was drawn up to prevent people who would ordinarily be viewed by HMRC as ‘employed’ from being taxed as if they were ‘self-employed’.

An IT worker might leave his permanent job one day, only to return the following week as a contractor working via a limited company – doing exactly the same work as he did before. In this instance, the contractor would be paying less tax and national insurance as a proportion of his income than he did beforehand. This is the type of scenario HMRC aimed to target via the IR35 legislation.

Q. How do I establish my IR35 status?

A. In cases where there is any doubt we will offer you a full IR35 review to verify whether your contract falls inside or outside IR35 legislation. This can normally be done prior to you taking any remuneration from the Company. We recommend having all contracts checked by employment status experts rather than accountants. You should be able to have each of your contracts checked for £80 or less.

Q. If I can’t avoid being caught by IR35, is it worth my while going to all the hassle of setting up a company?

A. Yes, because you are still able to claim a number of expenses against your income, and you will still benefit from being VAT registered (particularly via the flat rate VAT scheme). Also, cash flow patterns ensure that you can make money from the money you are making.

Q. What if I get an IR35 investigation?

A. Although the likelihood is relatively small, you may be investigated at some stage during your contracting career. As long as you have taken steps to ensure your contracts do not get caught by IR35, and have kept accurate tax records, you have little to worry about. We do recommend you take out tax investigation insurance cover all the same, as this will cover all legal costs which may arise out of a tax / IR35 investigation. We can help you find a comprehensive policy for well under £100 per year.