IR35 is a piece of tax legislation that was enforced in 2000, designed to reduce exploitation of the tax system by contractors supplying their services through a limited company when really the role they are undertaking should be that of an employed person. HMRC fall foul of this arrangement because directors of limited companies can take payment in the form of dividends, which are taxed at a lower rate than income tax.
It is thought that despite this legislation being brought in by the then Chancellor of the Exchequer, Gordon Brown at the turn of the century, that 9 out of 10 contractors who should be following these rules are choosing not to.
IR35 is a complex piece of legislation with many grey areas. Each case is assessed on an individual basis to define IR35 status.
If you are supplying your services, as a limited company contractor, to a medium or large sized organisation, the onus is on them to decipher the IR35 position. It is important though that you ask the question of the business and ask them to confirm and evidence how they came to their conclusion.
If, however you are supplying a small business, it is your responsibility to clarify the correct tax situation. It’s important to note that HMRC categorise a small company as one that does exceed 2 or more of the following:
- An annual turnover above £10.2 million
- A balance sheet total over £5.1 million
- Or more than 50 employees
The HMRC have released an online tool to help you reach the right conclusion:
If the outcome is that you are a ‘deemed employee’ you will have to pay tax on that contract period equivalent to that of an employee. This is likely to exceed your tax position if you were to simply process the work through a limited company contract.
Now, whilst ‘deemed employees’ will be expected to pay the same tax as an actual employee, they will not be able to access any of the same benefits, such as company pension schemes, sick pay and holiday entitlement. Whilst that may sound frustrating, if you are caught trying to work around or avoid IR35 legislation you will be required to pay the correct amount of tax based on historical contacts, plus any interest or penalties.
Let’s clarify some of the terminology surrounding IR35…
Inside IR35 – if you are classed as being ‘inside’ the scope of IR35 you are essentially considered an employee and will need to pay the relevant tax. This includes Income Tax on your earnings for that contract and National Insurance Contributions (NICs).
Outside IR35 – if you are classified as ‘outside’ IR35 then you can operate on a self-employed basis, opting to pay your personal / company tax liabilities as you see fit.
So, what’s new with IR35?
As of 6th April 2021, if you operate ‘inside’ IR35 working for a medium or large organisation it is the responsibility of the company to calculate your tax and deduct this prior to paying your invoice, removing any liability from you – the contractor. This has been the case in the Public Sector since 2017.
Doing the right thing…
If you think the work that you supply your clients falls inside IR35 jurisdiction you may wish to make some changes to your company structure. You could choose to close your company and change to operating through an umbrella company. This would enable the umbrella company to employ you, deducting your tax and NI, removing your need to complete accounts and tax returns.
As stated earlier, IR35 is complex, confusing and surrounded by grey areas. We would therefore advise seeking expert advice before making any decisions.
At Ellacott Morris our taxation experts are well versed when it comes to IR35, the pros and the cons. They are ready to share their wisdom and steer you in the right direction, helping you reach the most beneficial arrangement.
By Michelle Morris on 22/03/2021 12:00:00