Contractors Financial Risk as an IR35 Factor

Contractors Financial Risk
Contractors Financial Risk as an IR35 factor

Contractors Financial Risk

So, what is contractors financial risk and how is it a factor in determining IR35? A contractor has to show that there is financial risk to them in any contract between their limited companies and the companies they do work for.

One of the main differences between those who are employees and those who are in business on their own account is that employees have a stable level of income and get paid no matter how well or badly they do.

Those in business on their own account are usually taking a bit of a risk.

So, a contractor who has a daily rate and who gets that no matter how well or badly he or she does would be more akin to an employee as HMRC would see it.

Using Contractors Financial Risk to To Stay Outside IR35

There are 5 main ways contractors and freelancers can differentiate between themselves and permanent employees to show they are outside IR35 as regards Contractors Financial Risk. They are:-

  1. Take short contracts
  2. Take some fixed price work
  3. Take out Indemnity Insurance
  4. Use your own PC and equipment
  5. Fix any problems free of charge

Differentiating Between Contractors and Employees

So, how does one differentiate oneself from an employee of the company in that you have a financial risk?

Take Short Contracts

Financial Risk as an IR35 Factor
Financial Risk as an IR35 Factor

Taking short contracts shows financial risk – especially if you spend some time on the bench. You may not want to be on the bench but it does show that there is financial risk in the way you operate.

Do Fixed Price Work

Take a certain amount of fixed price work. There is a risk that you may not finish it within the time you expected so you would lose out.

Take Out Indemnity Insurance

Take out Indemnity Insurance in case you get sued by the company for causing a major problem. Employees of the company would never have to take out indemnity insurance.

Use Your Own PC and Equipment

Use your own PC and own equipment. There is a risk that they might break and have to be repaired which is not something that an employee would have to pay for.

Fix Problems Free of Charge

Have it inserted into your contract that you will fix any problems you cause free of charge. Add something onto your rate to cover for this. This will be fine for small fixes and your Indemnity Insurance should cover large problems.

Stay Outside IR35 Via Contractors Financial Risk

Once again the main thing is to differentiate the way you operate from the way that an employee of the company operates. If you operate in a totally different way than permanent employees you won’t be caught for IR35.

Lorraine Kelly IR35 Tribunal Case

There has been some good news recently for contractors as regards IR35. HMRC judged TV presenter Lorraine Kelly to be inside IR35. However, a tribunal found her to be outside. One of the main reasons was contractors financial risk.

Read why a judge decided that TV presenter Lorraine Kelly was outside IR35 due to financial risk and other reasons.

See also All the IR35 Factors affecting contractors

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