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Contractors and IR35 Tax Rules in the UK

Contractors and IR35 Tax Rules

The use of contractors and IR35 Tax Rules is not a new topic but it is one that is constantly evolving and many businesses are unaware that it is now (since 2021) the client’s responsibility to determine the IR35 status of contractors in both the public and private sectors.

This can have profound effects on a company that employs many contractors as if HMRC deem that the use of those contractors should be considered ‘deemed employees’, then there will be monies owned to HMRC and likely penalties.

Are SEO Contractors Still Viable for Clients?

The short answer is yes, they are still viable but there are certain conditions and circumstances that HMRC will review and if they deem that you have engaged a self employed contractor, when really, the contractor behaves like an employee, then you as the client engaging that contractor, are now liable.

Why Use SEO Contractors?

Freelance SEO Contractors, like many other skilled and experienced contractors are a valuable and flexible resource for an engaging company.

They usually come with more experience than most employees looking for full time work. They are often commercially aware from running their own business and in addition to the skill and experience, they can be employed on a fixed or rolling contract, without the human resources implications and considerations the engaging client has with its pay-rolled employees.

What is IR35?

IR35 is the name given to the HMRC tax legislation that is designed to identify contractors and their engaging businesses whom are avoiding paying the appropriate tax by said ‘contractors’ working as ‘disguised’ employees. 

Although designed to reduce tax avoidance IR35 is also beneficial to genuine employees who should be classed as such and prevents employers disguising their employment status as ‘self employed’ to deny full time employees certain rights and entitlements in addition to avoiding employers National Insurance, which is a considerable saving.

Avoiding IR35 Non Compliance

Now that since 2021, IR35 has been tightened further to put the onus onto the engaging client business, HMRC removed the last line of defence for clients in that they can no longer plead ignorance. 

Engaging clients now need to ascertain that they are IR35 compliant and only engage freelance SEO contractors (and other contractors) whom can satisfy HMRC’s scrutiny in proving that the contractor is not a disguised employee.

IR35 Guidelines for Engaging Contractors

HMRC will look at the full aspect of the relationship between the engaging business and the freelance seo consultant (or other contractors) and will consider the following (non exhaustive) list to indicate if the contractor is a legitimate contractor, or a deemed employee:

  1. Limited Company – Does the contractor have a limited company and if so, how long has the business been trading?

It stands to reason that if the contractor has been trading via a limited company for several years and in doing so has been paying business and personal taxes, has business insurance and other business expenses you would expect to see in a legitimate business, then HMRC would be satisfied.

  1. Website – Does the contractor have a company website and if so, does the website convey the image of a business looking for clients or that of an employee CV, looking for an employer?
  1. Exclusivity – This is often the biggest point of failure in IR35.

If there is an exclusivity clause in the contract of engagement then HMRC will all but certain consider the contractor a deemed employee and this is were a lot of companies run foul of IR35.

A number of questionable business practices such as making a number of employees redundant and then offering them self employed contracts doing the same work, but with less rights, benefits and entitlements (and reducing the payroll taxes) is exactly the behaviour HMRC is tackling so such a practice is certain to trigger HMRC action, or ‘wrath’ as its better known.

But a genuine contractor working for a genuine engaging client can still run foul of Contractors and IR35 rules if the contractor doesn’t have any other clients.

It should be enough for HMRC that the engaging client can demonstrate that the contractor mentioned previous/current clients and client case studies as part of the contract negotiation, or that the contractors website has client case studies mentioned.

  1. Use of Client Equipment – This will almost certainly run foul of IR35

If the client has to provide any equipment to the contractor in order to complete the contract then HMRC will doubt the contractor as being a genuine contractor.

You wouldnt expect the bride and groom to provide the camera for the wedding photographer on their big day and HMRC will take a dim view of any equipment being provided to the contractor, as any genuine contracting business would have its own equipment.

  1. The Duck Test

In the spirit of the old saying, “If it looks like a duck, swims like a duck, and quacks like a duck, then its likely a duck”.

In determining Contractors and IR35, both the engaging client and the contractor should put themselves in the shoes of HMRC and ask themselves whether they pass the ‘deemed employee test’ as falling foul of HMRC doesn’t just mean paying any back taxes and National Insurance but fines, penalties and backdated interest.

freelance seo consultant - Contractors and IR35 Tax

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