Tackling IR35: Does it Affect You?
Recent changes to the way that contractors are paid has added an extra layer of complication to the already confusing world of IR35 tax legislation.
Here, DUA outlines everything that contractors and consultants need to know about what IR35 entails.
What is IR35?
IR35 is the name given to tax legislation introduced in 1999, that is aimed at individuals referred to by HMRC as ‘disguised employees’. A ‘disguised employee’ is a worker who is supplying their services to a client via an intermediary, such as a limited company, but who would be an employee of the client if the intermediary was removed.
Under IR35, an HMRC inspector can disregard any contract between the worker and the client, and replace it with a ‘notional contract’ based on what they perceive to be the actual nature of the working relationship. The individual will be required to pay income tax and National Insurance contributions on their earnings as if they were employed.
The purpose of IR35 is therefore to ensure that individuals pay what HMRC cite as ‘broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.’
What has changed?
Although the legislation has been in place since 1999, recent major changes in the
way that contractors and consultants are paid have had significant consequences in the public sector. From 6th April 2017, public sector bodies are now responsible for determining whether a freelancer or contractor falls under IR35.
In cases where the new rules apply, the public-sector body employing the services of a personal service company or ‘one man band’ limited company, is considered to be the employer and required to deduct PAYE from the earnings.
To avoid running into difficulties with HMRC, public sector organisations have treated the majority of their contractors as employees without assessing their individual circumstances. This has had negative repercussions for the contractors– PAYE is being deducted from their invoices as if they were employees, but without the same level of employment rights.
For companies in the private sector, however, determining IR35 status remains as the liability of the contractor. Some observers expect this to change, however, with private sector companies also being expected to take responsibility for the IR35 status of their contractors. Should these changes come into effect, a large section of the UK’s skilled workforce could be affected.
How to prepare yourself
The impact of IR35 on your tax position can be significant. It is therefore crucial that contractors and consultants determine their tax status to avoid any adverse circumstances. You are currently able to carry out your own evaluation using HMRC’s online tool.
However, determining your position with regards to IR35 is a task that, ideally, should be undertaken with the help and direction of an expert. The tests used to determine whether IR35 applies to a working relationship are extremely complex, often requiring a considerable amount of knowledge and experience in the field of tax legislation – and that’s where DUA can help. Whether you are a consultant or a contractor looking to clarify your position, our team of business advisors and chartered accountants in Watford can guide you through the complexities of compliance. Arrange a no obligation consultation with us today to find out how we can help you with IR35.