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Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
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Just4contractors.com > Help & Advice > IR35
So, what is this IR35 all about?
As a professional contractor, IR35 is not something that you need to be worried about. However, it is vital that you are aware of it and the impact of it on your business.
IR35 was introduced because the Government believed that some people were providing their services through a limited company or a partnership as a means of avoiding tax. IR35 allows the HMRC to treat fees paid to a company or a partnership as an individual’s personal salary.
IR35 applies to all contractors who do not meet the Inland Revenue's definition of self-employment. So first, let us define self-employment. HMRC states that you are self-employed if you are in business for yourself and are responsible for the success or failure of that business, as opposed to being employed if you work for someone and don't have the risks of running the business. Those contractors who fall under the IR35 rules will be liable to an increased tax and National Insurance.
IR35 was introduced to tackle tax and NIC avoidance through the use of intermediaries such as service companies or partnerships. These intermediaries can be set up to provide the services of a sole worker to a client in circumstances where the worker would be an employee of the client, using the service company, which allows the client to make payments to the company rather than the individual without deducting PAYE or NICs. The worker would then take the money out of the service company in the form of dividends instead of salary. Dividends are not liable to NICs so the worker will pay less in NICs than either a conventional employee or a self-employed person.
Anyone working via an intermediary will be caught by the new rules if they fail the IR35 test. The test determines whether the person would be an employee if they were contracting directly with the client rather than using the intermediary. The IR35 legislation is designed to increase both the tax and NIC to the Inland Revenue from the service industry. The Revenue will often audit any contracts and the overall picture will be made up by how the contractor operates on a day to day basis.
The Inland Revenue's questionnaire to determine the status of employment has over 80 questions as they will consider as many factors as possible. It is imperative that as a contractor you have registered your business correctly since it will be very costly for you if additional taxes, NIC and penalties are added.
Legislations and regulations regarding employment status continues to be a growing concern of freelancers as these laws are very complex and confusing. In 1999, the Professional Contractors Group (PCG) was formed by a group of freelancers to protest against the Government's IR35 proposals. PCG has provided support and advise to various cases against IR35. PCG is calling on the new Government to prioritize the simplification of the definition of self-employment and how they are taxed.
One way of protection from the IR35 is to work through an umbrella company or managed service company (MSC) where the contractor becomes an employee and is paid by PAYE (pay-as-you-earn) and expenses, not dividends.
See Also
HMRC Compliance
Taxation for Contractors
Choosing the Right Business Structure
IR56
IR591
Recommended Links
The HMRC Guide to IR 35
Professional Contractors Group (PCG) - support for IR35
As a professional contractor, IR35 is not something that you need to be worried about. However, it is vital that you are aware of it and the impact of it on your business.
IR35 was introduced because the Government believed that some people were providing their services through a limited company or a partnership as a means of avoiding tax. IR35 allows the HMRC to treat fees paid to a company or a partnership as an individual’s personal salary.
IR35 applies to all contractors who do not meet the Inland Revenue's definition of self-employment. So first, let us define self-employment. HMRC states that you are self-employed if you are in business for yourself and are responsible for the success or failure of that business, as opposed to being employed if you work for someone and don't have the risks of running the business. Those contractors who fall under the IR35 rules will be liable to an increased tax and National Insurance.
IR35 was introduced to tackle tax and NIC avoidance through the use of intermediaries such as service companies or partnerships. These intermediaries can be set up to provide the services of a sole worker to a client in circumstances where the worker would be an employee of the client, using the service company, which allows the client to make payments to the company rather than the individual without deducting PAYE or NICs. The worker would then take the money out of the service company in the form of dividends instead of salary. Dividends are not liable to NICs so the worker will pay less in NICs than either a conventional employee or a self-employed person.
Anyone working via an intermediary will be caught by the new rules if they fail the IR35 test. The test determines whether the person would be an employee if they were contracting directly with the client rather than using the intermediary. The IR35 legislation is designed to increase both the tax and NIC to the Inland Revenue from the service industry. The Revenue will often audit any contracts and the overall picture will be made up by how the contractor operates on a day to day basis.
The Inland Revenue's questionnaire to determine the status of employment has over 80 questions as they will consider as many factors as possible. It is imperative that as a contractor you have registered your business correctly since it will be very costly for you if additional taxes, NIC and penalties are added.
Legislations and regulations regarding employment status continues to be a growing concern of freelancers as these laws are very complex and confusing. In 1999, the Professional Contractors Group (PCG) was formed by a group of freelancers to protest against the Government's IR35 proposals. PCG has provided support and advise to various cases against IR35. PCG is calling on the new Government to prioritize the simplification of the definition of self-employment and how they are taxed.
One way of protection from the IR35 is to work through an umbrella company or managed service company (MSC) where the contractor becomes an employee and is paid by PAYE (pay-as-you-earn) and expenses, not dividends.
See Also
HMRC Compliance
Taxation for Contractors
Choosing the Right Business Structure
IR56
IR591
Recommended Links
The HMRC Guide to IR 35
Professional Contractors Group (PCG) - support for IR35