IR35 Explained - Should I Be Concerned About The Rules?
Off-payroll working rules (also known as IR35) were designed and brought in to combat tax avoidance by workers and the firms who hire them.
These rules can be a minefield, so we’ve put together this post to help guide you through what you need to know and whether you need to do anything to stay above the rules.
When do the IR35 rules apply?
Based on HMRC guidance, IR35 rules apply if a worker provides their services through their own limited company or another type of intermediary to the client.
If the worker provides services to the client through an intermediary, HMRC may believe they would have been classified as an employee if they were contracted by the company directly.
When talking about off-payroll working rules, a contract can be classed as written, verbal, or implied agreement between the parties.
You will need to judge the cases on a contract-by-contract basis; it can be possible for a worker to have multiple contracts, with some falling under IR35 while others do not.
What do the rules mean?
You need to make sure your contractors can’t be classed as employees. If they have been carrying out work that would class them as an employee, you will need to pay them broadly the same Income Tax and National Insurance contributions as other employees.
These rules apply if the worker has been paid directly by the client, rather than through payroll.
Who do the rules apply to?
There are three main reasons the rules would apply to you:
- You are a worker who provides your services through your own intermediary
- You are a client who receives services from a worker through their intermediary
- You are an agency that provides workers through an intermediary
What is an intermediary?
Typically, an intermediary is the worker’s own personal service company, but it can also be any of the following:
- A partnership
- A personal service company
- An individual
Why is it important to know a contractor’s employment status?
If the worker would be classed as an employee if the intermediary wasn’t used, they will have to pay Income Tax and National Insurance.
If the worker isn’t classed as an employee, it can reduce the worker’s net income by up to 25%, which can cost the company thousands of pounds in additional income tax and NICs.
Is there any way I can avoid IR35?
There is no way to avoid IR35, other than to hire all contractors on fixed-term employment contracts and then pay all the employment taxes that go along with this.
However, this is an expensive way of avoiding the problem and would mean renegotiating with all of the contractors involved with the company.
If you’re using self-employed contractors, IR35 will not apply. However, HMRC can still investigate you at a later date, which can be time-consuming and costly.
Should you be concerned?
It can be costly if you get the determination wrong, so you need to keep an eye on all the contracts you use and make sure that your contractors couldn’t be seen as employees.
Remember, this can be a costly mistake if you get it wrong, so we recommend you seek specialist legal advice to ensure you’re heading in the right direction.
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