In recent years, an increasing number of contractor accountants have marketed themselves as ‘IR35 accountants’. Have these firms suddenly been gifted a silver bullet against IR35, or is this just a marketing phrase?
Unsurprisingly, in a similar fashion to the way umbrella companies have labelled themselves as ‘IR35 compliant’ in the past, this term is merely aimed at catching the eye of contractors (and search engines) in an increasingly competitive market.
Is your accountant a contractor specialist?
Accountants have no power to determine whether their clients are caught by IR35 or not, but when choosing an accountant, it is important to choose a firm which has in-depth knowledge of IR35 and the Off-Payroll rules.
A good accountant will be able to explain the financial consequences of falling inside IR35, and what measures contractors should take to comply with the rules.
For this reason, we always recommend our visitors choose a specialist contractor accountant to look after their limited company (and personal) tax affairs.
Accounting for IR35 status
Whether or not you are caught by IR35 or not makes little difference to an accountant’s workload.
If, as you hope, your contracts are not caught by IR35, you will draw down income from your company in the form of a modest salary and the remainder distributed as dividends. This is the most tax-efficient way to operate as a contractor.
If you are caught by IR35, after accounting for a fixed 5% allowance for ‘administrative expenses’ (if your client is a ‘small company’ in the private sector), you will draw income from your company in the form of a deemed salary which will be subject to standard income tax and NICs.
Understandably, there is a significant difference in the take home pay of contractors inside and outside of IR35.
How to mitigate against IR35
There are a number of things a contractor specialist accountant should do to help their clients comply with the IR35 rules.
Firstly, and most importantly, both your contract and working practices demonstrate that you fall outside IR35 and that you are not merely a ‘disguised employee’.
Since the roll-out of the Off Payroll rules in both the public sector (2017) and private sector (2021), some end-clients may force you either to accept being an ‘inside IR35’ contractor – still working via your company.
Or, they may insist that you use an umbrella company. In the latter case, you may decide to keep your limited company running in the meantime – or making it dormant. Your accountant will be able to advise the best way to do this.
Many accountants will refer their clients to a professional contract review service which will examine the terms or each contract, and advise accordingly.
Other steps include taking out IR35 insurance to cover the costs of a potential HMRC investigation and even tax liabilities you may be subsequently found to owe (subject to the level of cover you take out).
In the current HMRC penalties regime, these steps will also help demonstrate that you have taken reasonable care in showing that your contracts are free from IR35.