Originally introduced by HM Revenue and Customs (HMRC) in April
2000, IR35 contractor taxation can have a negative impact on UK
contractors by treating them as if they are their clients' formal
employees, rather than freelance operators.
Contractors who fall under the terms of IR35 legislation may see
tax and National Insurance contributions taken from their earnings
in a similar manner to the actual employees of the business they
provide contract services to.
Contractors might also have to deal with larger tax payments if
they are subject to IR35 tax. However, the services offered by
IR35solutions can help contractors to successfully navigate the
minefield of IR35, with our Contract Review and Contractor
Guarantee ensuring that any dangers are spotted at an early
stage.
Why did the government
introduce IR35?
IR35 was introduced by HMRC to tackle what they saw as tax and
National Insurance (NIC) avoidance schemes through the use of
intermediaries, such as Partnerships or Personal Services Companies
(PSC). Contractors often use a private limited company as a PSC to
contract and obtain work either direct from an end client or via an
agency.
HMRC believed that large numbers of Contractors were often
considered as self-employed when in fact they should have been
treated as employees of the end Client. Whether you were considered
self-employed or an employee was largely based on the terms and
conditions that the Contractors worked under. HMRC argued many
contractors were really 'disguised employees' if PSC or agent were
removed. The argument followed that some contractors should be
included on the client payroll and have tax and NIC deducted each
month.
Who does IR35
affect?
IR35 affects all contractors. At the very least all contractors
should consider IR35 and take all necessary means to protect
themselves from falling within it. However, not all contractors are
caught by IR35.
What happens if you are
caught?
If you are caught by IR35, then all fees are considered 'deemed
salary' and Tax and NIC will need to be deducted similar to an
employee. The financial impact on a contractor caught is
significant and those without the necessary safeguards will pay
considerably more tax. In some cases a contractor can have their
take home pay reduced from between 20% and 25%.