IR35 Accounting For Contractors
IR35 accounting is the process of keeping track of a contractor’s earnings and taxes. It can be a complex task but it is essential to ensure you are meeting your full legal responsibilities.
You can use a specialist ir35 contractor accountant to help you set up your ir35 accounting system and conduct risk assessments. This way, you can avoid mistakes and be confident you are in compliance.
1. Identifying the IR35 risk
With IR35 accounting regulations in place from April 2021, it’s vital to identify the risk that your clients may be facing. This is especially true if your client’s contractors are using a personal service company (PSC) as this can be particularly prone to IR35.
To determine whether your contractors are in IR35, there are three key factors that you should look at: Control, Substitution and Mutuality of Obligation. These are all deemed to be important by HMRC in determining whether an assignment is inside or outside IR35.
In terms of control, your contract should provide you with the right to control the work that you complete, including the time and place in which it’s completed. It should also have a clause that allows you to send another person (‘substitute’) in your place to perform the work.
2. Developing a strategy
In 2000, the UK Government introduced IR35 legislation to tackle the practice of ‘disguised employees’ who set up as limited companies but work exactly as a PAYE employee would. This allowed workers to pay less in tax through taking dividends from the company and paying National Insurance contributions on their own behalf, while avoiding the responsibilities of an employer.
However, IR35 can be costly and difficult for genuine small businesses to manage. This is why Government has opted to replace it with off-payroll working rules, which were initially introduced into the public sector in 2017 and extended to the private sector in 2021.
As with the public sector reforms, these changes put the responsibility on the end client to determine whether or not a contractor falls under IR35. SMEs were largely thrown out of the picture by the reforms.
3. Conducting due diligence
In order to protect your business against financial, operational and reputational risks, you should carry out effective due diligence checks on all the parties involved in your supply chain. This includes your immediate suppliers, employees and customers.
The new IR35 rules mean that you will need to undertake more thorough labour supply chain due diligence than before. If you don’t do this, you could be liable for unexpected tax and NIC liabilities.
It’s important to use the Check Employment Status for Tax (CEST) tool to determine your workers’ employment tax status. This is an HMRC-developed online tool that will help you answer a series of questions and assess their IR35 risk.
You also need to complete a status determination statement (SDS) and share this with your worker and the intermediary company. You can challenge an SDS if you think the decision is unfair.
4. Setting up a system
If you’re a contractor working through a personal service company (PSC) or end client, it’s important to set up an efficient system for ir35 accounting. This means determining the IR35 status of a contract as well as paying any tax and National Insurance contributions (NICs) on behalf of your PSC or end client, in the same way as you would an employee.
IR35 is an anti-avoidance piece of legislation that was introduced by the government to combat the issue of disguised employment. It aims to prevent contractors from operating through their own company as if they were employed by the client.
The rules were initially intended to apply only to public sector clients, but since April 2021, IR35 regulations have been extended into the private sector for medium and large-sized businesses. This means that the responsibility for determining whether IR35 applies moves from the PSC to the end-user, who must then confirm their assessment with reasons in an SDS.