The great advantage of being a self-employed contractor is that you can minimise your exposure to tax. Taking advantage of various tax breaks means you can be much better off than as an employee.
But tax can seem like a minefield to new contractors. It doesn’t need to be – ContractingWISE can help you to make sure you don’t fall foul of any of the complex laws surrounding self-employment and contracting, in particular the rules relating to IR35, BN66 and S660.
IR35 explained – avoid being tagged a ‘disguised employee’
‘IR35’ refers to legislation that HMRC uses to determine whether a contractor is really self-employed, or actually just using self-employment status as a way of unfairly avoiding tax. Unfortunately the rules are complicated and not clear, so some contractors end up being caught out. Don’t worry though – we’re here to make sure that doesn’t happen.
Essentially, the HMRC considers that a self-employed person should be able to choose when, how and where they work. Someone who has fixed hours, needs permission for annual leave, and can’t be replaced by a substitute, is much more like an employee – what the HMRC calls a ‘disguised employee’.
If the tax authorities investigate and decide that a contractor is really a disguised employee, they’ll have to pay back tax and even some fines.
Fortunately, there are ways of making sure that you don’t become subject to IR35 rules. At ContractingWISE, we can help you do an IR35 contract review to make your contract IR35 proof.
S660 settlements – Income shifting or splitting
For married couples where one spouse is a contractor and the other doesn’t work, you can limit your tax liability by making use of the non-working spouse’s tax free allowance and lower rate tax threshold.
By splitting some of your income – ‘income shifting’ – you can reduce your overall tax burden. It’s important though that this is done within the boundaries of settlements legislation, known as S660.
For example, if you contract your services through a limited company, then your spouse might be able to do the bookkeeping. They can be paid for their work by the company, or be entitled to dividends from the company profits.
The HMRC has unsuccessfully tried to stop or limit this practice, but at ContractingWISE we can help you understand what you can and can’t do.
BN66 loophole – the end of offshoring your tax
Until 2008, many freelancers and contractors used offshore schemes to significantly reduce their tax burden.
Contractors would sell their services through an offshore company in places like Jersey or the Isle of Man. Those contractors would be paid into an offshore account at very low tax rates, then send the money back to their UK account.
But in 2008 the Government introduced Budget Note 66, which closed the loophole to enforce the principle that UK residents should pay UK income tax. Worse still, the HMRC backdated the changes so that contractors had to repay any back taxes owed since 1987.
Fortunately, no new contractor is affected by BN66 as all those schemes are effectively closed to new entrants. But it’s worth remembering that some tax-efficient schemes that are legal now might not always be. ContractingWISE has a range of excellent partners who you can trust to look after your tax affairs the right way.