If your contract work is caught by the IR35 rules, the financial consequences can be severe. As a result, industry experts recommend that IT contractors take measures to protect themselves in the event of an HMRC IR35 compliance visit.
Income distribution if your contracts fall outside IR35
One of the main benefits of working via a limited company is that you can draw down your income in the form of a modest salary, and the remainder in dividends.
Dividends are not subject to National Insurance, and as a company director, you can plan when you distribute dividends – to make the most of your annual allowances.
You may also decide to split your shareholding with your spouse, to make the most of their tax-free allowance (this is particularly beneficial if they have no other form of income).
What if you are caught by IR35?
If you are caught by IR35, all of your income from affected contracts must be drawn down as a ‘deemed salary’ rather than dividends, and on average you could be £9,000 per year worse off as a result.
So, it is prudent for all contractors to take all necessary measures to ensure that their contracts are not caught by IR35 – by getting all contracts reviewed by employment status experts, and ensuring that your working practices mirror the terms of the contract.
The benefits of IR35 insurance
Whatever your employment status, there is a chance that you will be selected for a compliance visit by HMRC. Even if you are found to fall outside the scope of IR35, the compliance process can be an arduous one. This is where IR35 insurance can provide peace of mind.
We asked Seb Maley from Qdos to explain the benefits of taking out this type of protection:
“The first benefit to having IR35 insurance is knowing that you’ll have an expert fighting your corner if you are subject to an enquiry. Whilst most accountants will be well versed in the basics of IR35, it is unlikely that they have any significant experience in handling a fully blown enquiry and that is vital to a successful outcome. All defence costs will be covered and you will not need to deal with HMRC yourself, which is never a particularly pleasant experience.
“Secondly, and perhaps more importantly, if you are found to be caught by the legislation the policy will cover all tax, interest and penalties that you would be required to pay. Given that this will generally run into the tens of thousands of pounds, having an IR35 insurance policy provides genuine peace of mind.”
You can find out more about the IR35 protection services offered by Qdos Contractor here.