Your main concern should be to ensure that if you are not an employee of someone else and do work for them, you don't end up being treated for tax purposes as though you were an employee.
This conundrum is generally referred to as 'IR35', after the HMRC "help sheet" of that name. It is worth reading HMRC's own guidance on this.
It is also worth noting that the Government has consistently refused to disclose how much additional revenue it has raised through this initiative or how much it has spent trying to enforce it.
However, whilst we understand that they have lost the vast majority of cases, more recent cases have indicated that the courts are beginning to look more closely at this area, taking a wider view, and some decisions have unexpectedly gone HMRC's way. Accordingly you need to pay close attention to your contracts.
We suggest you look at the recent case of Dragonfly Consulting.
The broad thrust at the heart of a good IR35 contract is whether in the absence of your limited company vehicle you would be viewed as 'self employed'.
The term 'self employed' is not defined by statute, rather it is somewhat loosely defined by the past century or so's case law. However, the key question is whether or not you are in business on your own account.
This case law has thrown up a number of indicators which need to be considered when entering into a contract with your client - and it is not sufficient for these to be solely contract conditions. They must be reflected in the working relationship.
Mutuality of obligations - Is your client obliged to find you work? Are you obliged to work for them? If yes, then you are probably an employee.
Right of substitution - Do you have a genuine right to send someone else along to do the work? If so, then you are more likely to be viewed as being in business on your own account.
Provision of your own equipment or premises - If you provide your own kit, you are more likely to be viewed as being in business.
Control - Do you decide how to do the work, or does the client tell you how, where and when to do it? If you are not making the decisions, you look more like an employee.
How are you paid? If you are paid a regular sum at regular intervals for a regular amount of time, you look astonishingly similar to an employee in HMRC's eyes.
Intent - Was there any intent on the part of you or your client to create an employment situation? If so...
Long term contracts - HMRC have the idea that if you are engaged in a long term contract for a client, you are more likely to be a disguised employee.
Risk - How much risk are you bearing? Is there a risk of not being paid? Do you have to correct on your own time errors or deficiencies in the work you have done?
Whilst this is not a comprehensive list of things to watch out for when negotiating contracts, it does cover the basics.
You should consider contracts carefully for each assignment, and if you are unsure, seek professional advice.
You should also insure against the costs of professional representation in the event of being challenged by HMRC. The cost of defending yourself can be ruinous whilst insurance can be had for as little as £120 + VAT by joining PCG.
Of course, if you are a disguised employee, you should pay tax as though you are an employee - we strongly suggest in these circumstances you ask us to operate a PAYE scheme for monies from such contracts - or you could end up making a 'deemed' payment, which in certain circumstances can lead to you paying tax TWICE.
Read more at Pinsent & Mason's Out-Law site.
Download Qdos Consulting's
Free IR35 Compliance Guide.