IR35 came into effect in April 2000 as a preventative measure against people the government felt were avoiding paying sufficient tax by declaring themselves self-employed while only working for one company. Those that fall into this category now have to pay Schedule E and National Insurance after the deduction of expenses.

Self Employed? Or Just Employed?

IR35 is only effective on those it deems ‘employed’. It affects those who would have been given contracts of employment if they had worked directly for a company, rather than having gone through an intermediary such as a service company or partnership.

If you consider yourself ‘self-employed’ but feel you do not fall under new regulations, you may want to consider diversifying your work. But it may be safer to assume you are affected and seek financial advice from an accountant or Inland Revenue, which has a service you can send your contract to and they will tell you whether or not you qualify for IR35.

How To Deal With IR35?

Most contractors are worried more about being taxed than missing out on the normal perks such as sick and holiday pay. Normally, their income alone would have been sufficient enough to compensate for the lack of these benefits without a noticeable difference at the end of the year.

One way to get over the increased income rates is for contracts to charge 15-25% extra to cover short fall in income. This is becoming more and more common as time goes by, so if your contract is up for renewal, you could ask for a pay increase.

Claiming Back Expenses

You can also organise your expenses in such a way as to claim back as much as possible. The government gives contractors 5% expenses provision for your use. You can claim for:

• Accounting fees
• Computer equipment
• Computer equipment depreciation
• Company secretary salary
• Employer and public liability insurance
• Postage and stationary
• Training costs

What To Retain?

Contractors must still pay Schedule E Income Tax, and must therefore retain normal tax relief including:

• Benefits in kind
• Business travel
• Pension payments
• Professional indemnity cover
• Subsistence

If you are registered to pay VAT, you can still claim back 17.5% on computer equipment. You must also plan expenses in advance and take these things into consideration.

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