IR35 is a legislation that was introduced by HM Revenue and Customs in April 2000. It was to make sure contractors don’t get around paying their fair share of tax. It’s become an increasingly important topic for contractors in recent years, and yet many are still unaware of what it is and how it affects them.
In this blog article, RHJ Group look at the IR35 legislation in more detail and examine how it could impact you as a contractor.
What is IR35?
IR35 is a legislation that was introduced by HM Revenue and Customs in April 2000 to combat a practice called “disguised employment.” This refers to contractors who work as self-employed individuals, but essentially have an employment relationship with their clients.
The legislation was implemented to ensure that these contractors do not avoid paying their fair share of tax. Under IR35, if a contractor is deemed to be working in a manner similar to that of an employee, they are required to pay taxes and National Insurance contributions as if they were an employee. This means they are subject to PAYE (Pay As You Earn) tax and deductions, just like regular employees.
The goal of IR35 is to prevent tax evasion and ensure fairness in the taxation system. By targeting disguised employment, HMRC aims to ensure that individuals who should be classified as employees, with the associated tax obligations, are not misclassifying themselves as self-employed contractors to reduce their tax liabilities.
How IR35 works
IR35 is a complex legislation that contractors need to understand to ensure they are compliant with their tax obligations. So, how exactly does IR35 work?
Firstly, it’s important to note that IR35 applies to contractors who work through an intermediary, such as a limited company or a personal services company. The legislation determines whether a contractor is truly self-employed or should be considered an employee for tax purposes.
To determine a contractor’s employment status, HMRC looks at various factors, including the level of control the contractor has over their work, the degree of financial risk they bear, and whether they have the right to provide a substitute to carry out the work.
If a contractor is found to be inside IR35, it means that they are deemed to be working in a manner similar to that of an employee. In this case, the contractor is required to pay taxes and National Insurance contributions as if they were an employee. This means they need to operate a PAYE system and make deductions from their income.
On the other hand, if a contractor is outside IR35, they are considered to be genuinely self-employed. In this case, they are responsible for managing their own tax and National Insurance obligations.
It’s worth noting that determining employment status under IR35 can be complex and subjective. Therefore, it’s important for contractors to seek professional advice to ensure they are compliant with the legislation.
Understanding how IR35 works is crucial for contractors to avoid potential penalties and ensure they are meeting their tax obligations correctly. In the next sections, we’ll explore the impact of IR35 on contractors, provide examples of status determination, and offer tips on how to prepare for IR35 changes. Stay tuned!
The impact of IR35 on contractors
The impact of IR35 on contractors can be significant, as it can affect their tax obligations and financial situation. When a contractor is deemed to be inside IR35, they are essentially treated as an employee for tax purposes. This means that they will have to pay taxes and National Insurance contributions in the same way as a regular employee, which can result in a higher tax burden.
One of the main impacts of IR35 is that contractors may see a decrease in their take-home pay. As they will be subject to PAYE tax and deductions, their net income will be reduced compared to when they were operating as a self-employed individual.
Additionally, being inside IR35 means that contractors may lose some of the tax benefits and allowances that they enjoyed as self-employed individuals. For example, they may no longer be able to claim certain expenses as tax-deductible, which can further reduce their overall income.
Another significant impact of IR35 is the increased administrative burden that contractors face. They will need to operate a PAYE system and make regular tax and National Insurance payments, which can be time-consuming and complex.
Examples of IR35 status determination
Navigating the world of IR35 status determination can be confusing and complex. To help you understand how it works in practice, let’s take a look at a couple of examples.
Example 1: Emma the IT Contractor
Emma is an IT contractor who provides her services to multiple clients. She has her own limited company and is responsible for managing her own tax affairs. Emma has control over how she carries out her work, sets her own hours, and uses her own equipment. She also has the right to provide a substitute if needed. Based on these factors, HMRC determines that Emma is outside of IR35 and is considered genuinely self-employed.
Example 2: James the Project Manager
James works as a project manager for a construction company on a long-term contract. He works set hours, uses company equipment, and reports directly to a manager. He doesn’t have the right to provide a substitute and is heavily controlled by the company. In this case, HMRC would likely deem James to be inside IR35, as his working arrangements resemble that of an employee.
These examples illustrate the importance of understanding the specific details of your working arrangements when determining your IR35 status. It’s not a one-size-fits-all situation, and each case is assessed individually.
Remember, if you’re unsure about your IR35 status, it’s always best to seek professional advice to ensure you are compliant and avoid any potential penalties.
Stay tuned for the next section, where we’ll explore how to prepare for IR35 changes and minimise their impact on your business.
How to prepare for IR35 changes
As a contractor, it’s important to stay ahead of changes in legislation like IR35 to ensure you are compliant and minimise any negative impact on your business. Here are some key steps you can take to prepare for IR35 changes:
Educate Yourself
Take the time to understand the legislation and its implications for your specific situation. There are numerous resources available online, including official government guidelines and expert articles, that can help you gain a thorough understanding of IR35.
Review Contracts
Review your contracts with clients to assess whether they fall inside or outside IR35. Make sure your contracts clearly outline your self-employed status and highlight your autonomy and control over your work.
Assess Working Practices
Review your working practices and ensure they align with self-employment rather than employment. Document evidence that demonstrates you are in business on your own account and not under the direct control of your clients.
Seek Professional Advice
Consider consulting with an IR35 specialist or an accountant who has experience dealing with the legislation. They can provide valuable insights, help you assess your status, and guide you on the necessary steps to ensure compliance.
Maintain Clear Records
Keep thorough records of your contracts, invoices, and working arrangements. These records can be essential if HMRC decides to investigate your status, as they can provide evidence of your self-employment.
Consider Insurance
Consider taking out specialist IR35 insurance to protect yourself against potential tax investigations or disputes with HMRC. This insurance can provide coverage for legal fees and potential liabilities.
Stay Informed
Regularly monitor updates and changes to the IR35 legislation. HMRC often provides guidance and updates on their website, so it’s important to stay up to date with any new information.
Benefits of seeking professional help with IR35 compliance
Navigating the IR35 legislation can be complex and overwhelming for contractors. That’s where seeking professional help with IR35 compliance can be incredibly beneficial. Here are some key benefits of working with experts in this field:
Expertise and Knowledge
Professional advisors who specialise in IR35 have in-depth knowledge and expertise in understanding the legislation. They stay up to date with any changes or updates, ensuring that you receive accurate and current advice.
Risk Mitigation
Working with professionals reduces the risk of making mistakes or misinterpreting the legislation. They can help you accurately assess your status, review contracts, and ensure compliance, minimising the risk of penalties or legal issues.
Personalised Advice
Each contractor’s situation is unique, and a professional advisor can provide personalised advice tailored to your specific circumstances. They can analyse your working practices, contracts, and other relevant factors to determine your IR35 status and guide you accordingly.
Time and Effort Savings
Trying to understand and navigate the complexities of IR35 on your own can be time-consuming and overwhelming. By working with professionals, you can save valuable time and effort, allowing you to focus on your core business activities.
Peace of Mind
Having professional support and guidance can provide peace of mind. You can rest assured knowing that you have taken the necessary steps to comply with IR35 and are well-prepared for any potential challenges or changes.
IR35 & Non-UK tax residents
IR35 only applies if there would be a PAYE and/or NICs liability if the Contractor was engaged by the End User directly as an employee.
Where the Contractor is both tax resident outside the UK and performing all their services outside the UK, there is generally no PAYE or NICs liability in respect of that individual. This means you would not need have to carry out a status determination.
HMRC guidance ESM10025 states that: “A client does not need to consider whether Chapter 10/Part 2 rules apply where there is no liability to tax and NIC’s in the UK”, and “a worker who is not UK-resident and is performing work outside the UK is unlikely to fall within the charge to UK tax or NIC’s. If the worker is not chargeable to UK tax or NICs, then the off-payroll working rules will not apply.”
Therefore, if you are working abroad and qualify as a non-UK resident through the Statutory Residence Test, you would not be subject to the off-payroll rules.
How can we help you
Here at RHJ Accountants we offer a range of tax services to help you manage various fiscal obligations for your personal and corporate life.
If you have any questions regarding our tax services please don’t hesitate to contact our team, or view our FAQs!
