Umbrella Company Guide: Do Contractor’s Need IR35 Insurance?

Posted on in Umbrella Company.

The answer is of course, "it depends".  Basically, HMRC can review any contract and determine whether it qualifies as "disguised employment".  If, according to HMRC’s criteria, the contract qualifies as disguised employment, then the contractor will have extra tax, and perhaps penalties, due. 

Although in years past HMRC didn’t take IR35 enforcement seriously, it’s taking increasing measures to enforce the legislation.  In 2010, just 12 investigations occurred, but in 2011, that number grew by five times, to 59.

Of course, most contractors play by the rules to the best of their knowledge, and as long as they’re making their most honest attempt to pay the taxes they truly owe, they shouldn’t fear investigation by HMRC.  If the umbrella company managing their taxes seems deceptive in nature, then the contractor should change companies.  Ultimately, whether the umbrella company makes the mistake or not, the contractor is held financially responsible for any IR35 violations.

Criteria HMRC Uses to Determine IR35 Compliance

Like most government legislation, IR35 is not simple.  Below are just some of the criteria HMRC uses to determine compliance with this legislation:

  1. Background – HMRC investigates how the work was obtained.  If the job advertisement wanted an employee, then the contractor may be classified as such.  Contractors replacing employees, even if the advertisement requested a contractor, may also be considered employees.
  2. Previous HMRC ruling – Contractors may not be aware of a previous ruling by HMRC, and clients may not be required to tell contractors due to confidentiality reasons.  If HMRC believes the contract is really for a disguised employee, contractors may be considered such an employee even though they had no knowledge of previous circumstances.
  3. The contract itself – This is by far the most important consideration in determining IR35 compliance.  The contract, generally, must be “genuine” – an original document to which both the client and contractor agree.  Contractors given a template contract from an agency or who use a copy from a friend or a website run the risk of being deemed not to comply with IR35.
  4. Client control – If clients control the contractor’s working conditions, in HMRC’s eyes, that contractor may really be acting as an employee.  Contracts should not discuss when contractors begin and finish the day, the days they are expected to work, and times the contractor can take lunch.    

Seek the Help of a Professional

Ultimately, for contractors who must be sure they are complying with IR35, the advice of a professional accountant or the appropriate person at their umbrella company. 

 

 

 

 

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