What is IR35? A Contractor’s Guide to IR35 Legislation

20.04.22

As a contractor, you may have thought that you enjoy greater freedom, only to find that the taxman is now looking over your shoulder. IR35 refers to a set of tax laws that focus on you as a contractor as well as your client companies or intermediaries to ensure that you (or they) are paying enough tax.

In this article, we’ll look at IR35 from a contractor’s perspective in an effort to help you navigate the stormy seas of tax compliance. It’s a hugely important issue, and as a contractor, you literally cannot afford to overlook it. After all, nobody likes discovering that they have an unexpected tax liability, so it’s best to remain fully compliant!

Before we begin, you might be wondering what IR35 stands for. If you scented an acronym, you’re right! It’s Inland Revenue’s (IR’s) 35th press release, and it was announced on the 9th of March 1999. IR35 was seen as an important tax reform, but its implementation was delayed till 6 April 2021. New tax legislation can be a minefield, and it’s hugely important that those affected, in this case, contractors, should know how it affects their finances and mode of work. So, what are the IR35 need-to-knows?

Deemed Employees or Contractors?

You may have set up your own limited company in order to conduct your trade, but if you fulfil the legal requirements set out to determine who is an employee, you might be in for a nasty surprise. Your net income could be reduced by up to twenty five percent owing to additional income tax payments and National Insurance Contributions (NICs).

What does inside IR35 mean? It means that, for taxation purposes, you are seen as an employee rather than being self-employed. Up goes your tax, and down go your profits. 

What does outside IR35 mean? It means that for tax purposes, you are seen as a self-employed contractor, and there are certain criteria that are used to distinguish between employees and contractors. For example, you will likely be working on a project rather than providing continuous services, and you will be able to serve more than one client at any given time. 

Your contract is an important consideration. It should stipulate what you’re doing, but it shouldn’t include your involvement in any of your clients’ regular employment practices such as submitting to performance appraisals. If your business is a true contracting concern, you needn’t even be there in person. There’s nothing to stop you from sending your own employees to do the required work. 

What is IR35 and the new Off-Payroll Tax?

Here’s the rather painful truth: you may have thought you were an independent contractor, but if your services are provided to a client and your working conditions indicate that you’re legally an employee, you’re “deemed an employee.” That means an additional tax and insurance liability. 

So, you aren’t on your client’s payroll, but Her Majesty’s Revenue and Customs (HMRC) nevertheless regards you as an employee, and you’re taxed as such. Working through an agency or intermediary doesn’t give you any protection here, but thankfully, IR35 excludes umbrella companies. It may seem like a small distinction, but in practical terms, it could mean a lot to you. 

What are IR35 rules? If you could be deemed an employee, you’ll pay more tax. Not sure where you stand in this complex environment? Fortunately, HMRC offers an online tool for determining whether you might be “deemed an employee” even though you thought you were a contractor. 

Why was IR35 introduced by the government?

The simple, and rather jaded answer is: “to get more tax revenue.” The long-form version is that organisations were avoiding tax by declaring people who would otherwise be employees to be contractors. The companies need the employees, but instead of using an above-board hiring procedure, they use intermediaries or self-employed workers to fill the gaps while expecting working conditions to remain very much the same as they would if they had provided an employment contract.

Who Decides if IR35 Applies to a Contract?

Regretfully, deciding whether IR35 applies is not up to you and it isn’t up to your client either. From a legal perspective, HMRC decides the matter based on the criteria of who can be deemed an employee. We encourage you to use the tool linked above if you’re concerned that a contract you’re considering may fall inside IR35. 

IR35 Checklist: Am I Compliant? 

Use this checklist to determine whether your contracts are at risk of falling inside IR35.

Do you have the freedom to decide when and where work takes place?  If hours of work and locations are specified, you may be at risk of being deemed an employee. 

Do you shoulder financial risk and provide your own equipment? If you provide your own tools and equipment, and risk non-payment if your client isn’t satisfied, the answer to this is probably “yes.” That means you aren’t deemed an employee and aren’t subject to IR35.

Can you send someone else to get the job done? If you can send someone other than yourself to perform work, you are likely to be considered a bona fide contractor not subject to IR35. 

Can your services be terminated with immediate effect? If they can’t, you might be at risk of being seen as an employee rather than an independent contractor. 

Are you eligible for employee benefits? If you get paid holidays, sick leave, and so forth, you are likely an employee rather than an independent contractor. Employee benefits may sound nice, but the extra tax might not please you as much!

What to Do if IR35 Applies

If IR35 applies, it’s to be hoped that you have access to a good accountant. But in simple terms, you’ll have to rework your accounts. If you’re working on an IR35 contract, you’ll need to determine the deemed payment in question, deduct PAYE on your “salary”, allow yourself 5 percent of that for expenses and deduct any pension contributions in order to determine your tax liability.  It’s not a pretty picture. 

IR35 How to Avoid the Minefield

If navigating IR35 isn’t a risk that you, as a contractor, want to deal with, you’re far from being alone. Fortunately, there’s a simple solution. Let Evolve CS act as your umbrella company. By doing so, you’ll avoid the potential for financial loss associated with falling within IR35, and you’ll gain a wide range of benefits besides that. 

We leave you to do business as you want to, handle a slew of administrative headaches you’d otherwise face, and provide you with the support you need to carry on doing what you do best. It’s worry-free, straightforward, and smart. Want to know more? Get in touch! We help you to realise your vision as an independent contractor.

 

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