IR35 is notoriously complicated to grasp and if you’re trying to get your head round this complex legislation, even HMRC’s guidance can prove unhelpful. Our aim is to explain IR35 in simple terms to better equip you in understanding if you’re paying tax correctly under IR35.
IR35 ‘intermediaries legislation.
IR35 is the HMRC legislation that ensures the tax you pay accurately reflects your employment situation. IR35 most commonly applies to contractors providing services to an end client through a limited company.
These rules are enforced by HMRC under the named ‘intermediaries legislation’ or IR35. An intermediary is the entity that sits between the end client and the worker (you), such as the agency or limited company.
IR35 was first introduced in 2000 to combat employees disguised as personal service companies, reaping the tax benefits of operating as a contractor. Providing services through a limited company means that you are able to split your Income Tax and National Insurance Contributions favourably between a low salary and high dividends – thereby achieving a higher take home pay than a full time employee.
Why is IR35 important?
In a nutshell, IR35 determines if you’re an employee of the client or a limited company contracting your services to that client. Under the legislation you are required to pay roughly the same Income Tax and NICs as you would if employed directly; rather than contracted through your limited company. The liability rests with the service company not the client unless a public sector client is involved.
The financial impact of IR35 can be significant. You may find that your earnings are reduced and that you have to pay Income Tax and NICs retrospectively.
Does IR35 apply to you?
As with all things HMRC – gauging your true status is not straightforward. You would be forgiven for thinking that because you have a limited company and your work isn’t permanent, you are therefore a contractor – this is unfortunately not the case.
HMRC have recently published updates to the legislation and so it is important to carefully assess whether or not it applies to you. One of the big questions to ask is if your work is controlled and directed by you or, if you are subject to an employer/employee relationship.
As you would expect, they are becoming increasingly tough in regards to enforcement; particularly for those working in the public sector.
If you need help with IR35 assessment or have any questions. Get in touch today.