UK tax legislation relating to the contracting field gets more and more confusing and convoluted every year.

The aim of the HMRC is to remove the tax advantages from contractors who are selling their services via partnerships, under umbrella or managed service companies. The view of those very generous people at the Revenue is that contractors are, in effect, full time employees and should be taxed accordingly. Contractors, unsurprisingly, do not agree.

The legislation that governs this often fraught relationship is IR35. IR35, in short, is a ruling that states if you can be considered 'employed' by the company you are contracting your services to, then you become liable to pay tax and NI contributions as if you were directly employed by that company.

Some of the indicators that a contractor falls under the IR35 legislation are as follows :

1)The contractor has no financial risk from working on the project in question.

2) The contractor does not use his own materials and/or equipment on the project.

3) The contractor has set hours, as would a normal 'employee'.

4) The contractor works solely for a single client and does not have several clients.

Contractors looking to maximize their income would be well advised to be aware of IR35 before signing any contracts. Avoiding IR35 can make a very significant difference to the income of a contractor.

Even better, they should, at the very least, speak to an accountant who has significant experience in dealing with contractors.

In essence, contractors falling outside IR35 have two basic choices, now that Managed Service Companies have effectively been outlawed by recent changes in legislation.

The first choice is an Umbrella Company.

An umbrella company is, in effect, your employer for tax purposes when undertaking a contract with either a client or an employment agency.

Umbrella companies raise invoices on your behalf and pay you once they have received the funds. Many umbrella companies pay you the same day they receive the funds, but some will pay you only once a month.

What you will receive from an umbrella company is a payslip detailing not only your tax and NI contributions (both employee and employer contributions), your umbrella company's fees and any expenses claimed.

Umbrella companies have a special dispensation that means that they can process some expenses without having to record them on a P11D. This does not mean that, if investigated, you don't have to produce receipts for all expenses. You do.

However, all expenses are processed by your umbrella company, making things very much simpler for you. Expenses that can be charged to your employment agency or to your client will be refunded to you in full, while those expenses which are not are processed as a tax benefit.

The second option available to UK contractors is to set up a limited company, whereby you, the contractor, become the director and major shareholder in the company.

Page 1 of 2 :: First | Last :: Prev | 1 2 | Next