How to avoid IR35 in 2021
Updated: Nov 11
As you may know, IR35 is kicking in on the 1st of April 2021. Many industries, like HGV drivers or IT contractors, work within their own limited company and are going to have to rethink their working practices after this date or risk paying extra NI and Taxes.
Why is this happening?
According to BDO “The government believes that not all PSCs have operated IR35 correctly over the past 20 years that the current legislation has been in existence. Only around 10% of Personal Service Company owners were assessing their status as employed and operating PAYE/NIC on fees received, according to HMRC.”
This means that 90% of companies in this study were avoiding paying NI taxation, which is costing the government millions in lost revenue.
The effect IR35 will have on many industries will be significant. The options are for people
Go PAYE through direct employment with the user.
Work through an umbrella company
Change the way the company operates.
Let's look at these, one by one.
Firstly you should look at whether you will fall within IR35. The criteria to look at is:
Can I send someone else to do the work?
Do I own the equipment required for the work?
Do I bare the risks and rewards of the business?
For how long is the period of work?
How many clients do I have?
Does my business include other business activities?
Answering the above questions will indicate whether you are within the scope of IR35 and whether you should be making alterations to your business model now.
If you are unsure here's what you need to do:
Change the way the work is set up.
If you can send someone else to do the work you are not an employee. If you can, make sure this is in the contract, and occasionally swap with a colleague so this is recognised in your business accounts or paperwork.
Buy the equipment you need for the work you are doing.
Owning a significant piece of equipment which would indicate investment and therefore indicate a genuine business will add weight to your claim that you are not an employee under IR35.
Is there a financial risk involved?
If there is no risk it will be difficult to argue you are a genuine business and would add weight to the argument you are a disguised employee. Although, this isn't always easy to determine since some types of business can be provided without any real chance of making a loss, like in the IT sector for example. It is useful, however, to look at your business and ask your self this question.
Can you increase the profits? If you can change the way you work, or make changes to the duties of your business covers, it will indicate you are not an employee. Advertising, admin costs, adding new features or benefits, will mean it is harder for HMRC to determine you are an employee.
How long have you worked for each client? If you are working for a client for a long period of time, it would signify you are an employee. The greater the number of clients, and the shorter each engagement is, the more likely it is that you are running a business rather than being an employee. If you only have one client, HMRC is likely to win an IR35 challenge - so increase those customer numbers and swap regularly.
Have you received benefits from the client?
Benefits in kind, like a phone, laptop, use of the company car would indicate you are an employee. Avoid these and make sure you only accept payment through remuneration, and they match up with invoices generated.
The Good News!
Going self-employed is easier in most cases than people think. The reporting standards are less stringent and there is £12,500 personal allowance. The costs of filing a self-assessment at
Shortandsons are £200-250 for a Sole-Trader compared to £480 for a limited company, and the limited company in most cases requires software to complete the bank reconciliation,
By going self-employed you will save money on accountancy fees, time, and risk if IR35 too.
If you would like more information or would like to join Shortandsons.co.uk please head to our home page or call us on 07481 479933 / 01784 390021 / firstname.lastname@example.org.