Contracting: Your Essential Guide to IR35, EAA Rules, and Best Practices

In today's dynamic work landscape, contracting offers exciting opportunities for IT professionals across various industries. Whether you're a seasoned contractor or considering this path for the first time, understanding the rules, legislations, and best practices is essential.

This guide aims to provide clarity on two critical aspects: IR35 and the Employment Agencies Act (EAA).

What is IR35?

IR35, or off-payroll working rules, is legislation designed to combat tax avoidance by individuals who supply their services through an intermediary, often a limited company, while effectively working as employees. The rules assess whether a contractor is genuinely self-employed or if they are essentially functioning as an employee of the client.

• Inside IR35: If your contract falls inside IR35, it means you are deemed an employee for tax purposes and must pay PAYE (Pay As You Earn) tax.
• Outside IR35: If your contract is outside IR35, you are considered self-employed, allowing you to enjoy tax advantages.

Things to Consider

1. Higher Tax Liabilities: Contractors deemed inside IR35 are subject to income tax and National Insurance contributions like regular employees, reducing their take-home pay.
2. Limited Company Responsibilities: Contractors must comply with regulations regarding PAYE, which can create additional administrative tasks.
3. Contract Assessment: Clients are responsible for assessing a contractor's IR35 status. This means it's essential for contractors to ensure their contracts clearly reflect their self-employed status.
4. Documentation: Contractors should maintain thorough documentation, including contracts, communications, and proof of business activities, to demonstrate their self-employed status if challenged by HMRC.

How to Determine Your IR35 Status

Determining your IR35 status requires a review of your contract assignment and working practices. Here are key factors to consider:

1. Control: Who has control over how, when, and where you work? If the client dictates your working hours and processes, you may be at risk of falling inside IR35.
2. Substitution: Can you send someone else to do your work? If you can’t, it may indicate an employee-like relationship with the client.
3. Mutuality of Obligation: Is there an expectation for the client to provide continuous work, and for you to accept it? A mutual obligation can suggest an employee status.
4. Equipment: Do you supply your own equipment or use the client's? Supplying your own tools typically indicates self-employment.
5. Financial Risk: Do you take financial risks in your work? Genuine contractors usually have the potential to profit or incur losses, unlike employees.
6. Statement of Work (SOW): Is there a specific contract outlining the work schedule and deliverables, for specific timetables? The work & contract is usually complete once the piece of work has been completed (i.e. not a rolling contract!).

What to Do if You're Inside IR35

1. Review Your Contracts: Ensure that your contracts clearly define your self-employed status and include clauses that protect your position.
2. Consider Business Structure: If you’re consistently falling inside IR35, consider whether operating through a limited company or as an umbrella company would be more beneficial.
3. Engage Professional Help: Consult with a tax advisor or legal expert who specialises in IR35 to assess your situation and get tailored advice.

Not sure if the status determination has been completed correctly? Ask to see a copy and challenge anything you feel is unfair.

EAA Rules: What You Need to Know

The Employment Agencies Act (EAA) establishes important regulations to protect work-seekers and outline agency responsibilities:

• No Work-Finding Fees: It’s illegal for agencies to charge fees for work-finding services. Candidates can only be charged for additional services like CV writing.
• Written Contract: Agencies must provide a written contract detailing pay, holiday entitlement, hours, notice periods, and whether it’s a contract for services or employment.
• Agency Responsibility: Agencies are legally obligated to ensure candidates possess the appropriate skills and qualifications for the roles they apply for.
• Pay Protection: Your pay cannot be withheld, even if a dispute arises between the agency and the employer.
• Transparent Advertising: Agencies must clearly communicate that they are advertising on behalf of an employer, not as the employer themselves.

Limited company contractors can opt out of these regulations, but it’s crucial to weigh the pros and cons, particularly concerning IR35 implications.

Be aware – you must opt-out prior to your contract starting. You do this by informing?your employer/agency and?signing an EAA opt-out form.

Limited vs Umbrella Companies: Which Should You Choose?

One of the most significant decisions you’ll make as a contractor is whether to operate through a limited company or an umbrella company.

Limited Company

Operating through a limited company offers considerable tax benefits. Contractors can pay themselves a salary and draw dividends, which can reduce the amount of National Insurance they pay. However, limited company contractors are responsible for managing their own accounts, taxes, insurances, and filings - a process that can be time-consuming but manageable with the help of an accountant.

Umbrella Company

For those new to contracting or unsure if they want to commit long-term, working through an umbrella company is a simpler option. You effectively become an employee of the umbrella company, who takes care of admin tasks like payroll, but you’ll lose some of the tax benefits associated with a limited company structure.

Deciding Which Route to Take

There are pros and cons to both setups, and the right choice will depend on your career goals, the length of your contracts, and your attitude toward managing business finances.

Remember, you can change your operating structure at any point during your assignment, from limited to umbrella, or umbrella to limited.

At Mexa Solutions, we can help you understand both options in more detail and guide you through setting up your business.

Best Practices for Thriving as a Contractor

Understanding the regulations and rules is important, but so making sure you get the best career opportunities.

Here are some essential strategies to enhance your visibility and effectiveness in the job market:

1. Tailor Your CVs: Create multiple CVs tailored to highlight the specific skills relevant to each application, ensuring you stand out in the competitive contracting market (keep it succinct, and showcase your achievements).
2. Use LinkedIn Recommendations: Collect recommendations to build credibility and establish yourself as an industry expert, attracting opportunities organically.
3. Invest in Continuous Learning: Stay ahead by pursuing relevant training and certifications, demonstrating your commitment to professional growth.
4. Embrace Emerging Technologies: Adapt to the evolving tech landscape by honing skills in emerging technologies, ensuring your marketability remains strong.
5. Document Your Achievements: Keep a record of your accomplishments to showcase your capabilities during interviews and in your CV.
6. Know Your Worth: Understand your financial targets and don’t settle for undervalued contracts, which can hinder your long-term growth.
7. Be Selective: Choose your work opportunities wisely by collaborating with agencies that specialise in your niche.

How Mexa Solutions Supports Contractors

At Mexa Solutions, we understand the complexities of contracting and are here to support you every step of the way. Whether you’re a seasoned contractor or considering making the leap, we offer a wide range of services to ensure you’re successful:

• IR35 Guidance: We help contractors understand the intricacies of IR35 and ensure their contracts are compliant, giving you peace of mind that you're working under the right terms.
• Limited or Umbrella Setup Advice: We can guide you through setting up as a limited company contractor or choosing an umbrella company based on your individual needs and future goals.
• Rate Negotiation: We make sure you’re paid what you’re worth by handling rate negotiations, ensuring you receive fair compensation for your skills and experience.
• CV Review: Contracting often means working in multiple roles. We help you streamline your CV to showcase the most relevant experience and achievements, avoiding unnecessary length and repetition.
• Hassle-Free Payroll: With our partnership with an industry-leading finance provider, you can get paid within just three days of timesheet approval. No more chasing payments - just a simple, efficient payroll process.

Ready to Take the Next Step in Contracting?

Whether you’re just starting or are an experienced contractor looking for your next challenge, Mexa Solutions can help you navigate the world of contracting with ease. Get in touch with us today to find out more about how we can support your career journey.

For a look at the career opportunities we currently have available, take a look at the jobs section on our website.

Contact us:

Phone: 01489 850202

Email: [email protected]