IR35 Tax Advice

What is IR35 and how does it affect you if you are a Contractor or Considering Contracting?

IR 35 refers to the:

Intermediaries Legislation - Working through an intermediary, such as a Personal Service Company.

IR35 was actually the number allocated to the original Inland Revenue (HMRC) press release (9 March 1999) and it stuck as the name everyone knows the legislation as.

A copy of the original IR35 press release is available online at HMRC.

A common complaint about IR35 is that it is too subjective and there is no definitive YES or NO answer to whether you or your company are caught by IR35.

HMRC have tried to counter this complaint by issuing guidance, IR35 business tests and example scenario.

Why was the IR35 release issued?

The release was issued to address the issue that people performing a role through their own Personal Services Company or intermediary (such as a partnership) could pay considerably less tax than those in employed work doing the same tasks at the same rates. This is often referred to as “Tax Avoidance” but it was legal at the time.

The benefits of the fact people could pay less tax was also resulting in the following:

  • People were losing the protection that they would have received from employment law and found themselves losing rights to maternity and sick pay.
  • Businesses looking to employ staff were also losing out when competing with companies who encouraged the tax avoidance schemes.

IR35 Legislation

IR35 is Government legislation relating to Intermediaries introduced on 6th April 2000 in the Finance Act 2000. The legislation has been consolidated in the Income Tax (Earnings and Pensions) Act 2003 and in the Statutory Instrument Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727.

It was introduced to stop Contractors avoiding tax and National Insurance through the use of Intermediaries such as Personal Service Companies or Partnerships. Historically people saved National Insurance contributions by drawing out “wages” via a dividend.

IR35 ensures you pay tax similar to what you would pay if you were employed rather than being a contractor i.e. you have to pay additional tax and National Insurance Contributions.

How does IR35 affect you - the contractor?

The good news is if you are a contractor you don’t have to worry about IR35 if you join an umbrella company.

If you join an Umbrella Company you become an employee and as such are outside the scope of IR35.

If you however you are a high paid contractor outside the scope of IR35 then it can be beneficial to remain as self-employed to take advantage of the huge tax advantages.

If you were to join an Umbrella Company then you are taxed as if you are caught by IR35 (because you are taxed as an employee). work in association with the Umbrella Company - PayMatters LTD

For Umbrella Company Advice please call 0800 121 6513.

Wikipedia IR35 definition

Wikipedia give a detailed definition of IR 35: IR35 Wiki

How does IR 35 affect me??

If you are a contractor then you have to consider IR35.

IR35 means that some contractors can be taxed the same as if they were employees.

If you are a contractor caught by IR35 then your take home pay can be up to 20-25% less than if you weren’t caught by IR35.

Basically the terms and conditions you work under if you are self-employed can dictate that you should be treated as an employee rather than as self-employed.

IR35 aims to address tax avoidance schemes by treating people working through intermediaries such as Personal Service Companies (PSC) or Partnerships as if they were employees.

If you are caught then all fees are deemed as your salary and need to have Tax and National Insurance (NIC’s) deducted.

Deciding if you are caught by the scope of IR35

Unfortunately for contractors it is not a black and white issue to decide if it relates to you.

For some contractors it is clear that you are definitely inside or outside but for the majority you are in a grey area where you could be or maybe not!!

There is no written legislation that dictates how you decide if someone is self-employed or an employee. In this scenario the only basis a decision can be made is through case law (i.e. looking at previous similar cases).

It is therefore important to take legal advice for a view to be made.

Failure to comply to IR35 can lead to an Inland Revenue investigation.

HMRC IR35 Business Test

HMRC are launching a new IR35 Business Text in May 2012. The test is designed to see if your business is high, medium or low risk of being subject to an IR35 review.

The review will cover areas and award points depending on your answers as to whether you employ staff, have your own offices or premises, whether you spend money on advertising, if you vary the people you work for and whether you have any invoices that haven’t been paid.

It is expected therefore that a large proportion of contractors doing the IR35 business test will return a result of medium to high risk especially if you are the only employee without an office and have performed your work for one client over the last 12 to 24 months.

If you are a contractor working through your own limited company and are worried about IR35 reviews and/or considering to switching to working through an umbrella company please call PayMatters on 0800 121 6513 for IR35 advice.

IR35 Common Questions

HMRC have produced a detailed FAQ relating to IR35.

IR35 Calculator

How is IR35 Calculated?
IR 35 calc produce useful information and calculators.

They show how much you earn if outside the scope of IR35, if you are caught by IR35 (and if you are caught how much you’d have to increase your hourly rate by to be no worse off). If also compares contractor to wages to being a full-time employee.

IR35 Tax

Note: You should always speak to a Qualified IR35 Accountant for IR35 advice.

Looking for IR35 Accountants - Free IR35 Advice

Worried about IR35 Compliance?

Please call PayMatters LTD on 0800 121 6513 for free advice. For customer service for existing clients, please call 0844 335 0169.

Inland Revenue Release, IR35, IR 35

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