Put simply, IR35 is a word used to describe two sets of tax legislation that are designed to crackdown on tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.
the IR35 is tax legislation was established in 1999 which form part of the Finance Act. It aims to stop individuals from avoiding tax by supplying their services to clients through an intermediary, like a limited company. Also known as ‘disguised employees’ by HMRC, these individuals, for all intents and purposes, look, act and are employees. However, rather than being on the payroll, they’re registered as limited companies, so they pay less tax.
Employing individuals as “contractors” can save the business a significant amount of money as they no longer have to pay employers’ National Insurance Contributions (NICs) or provide employment benefits like paid holidays and sick leave.
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees.
Inside IR35 is HMRC’s term for individuals registered as limited companies that act like employees and are in violation of this regulation.
Companies that do not violate IR35 are known as ‘outside IR35’ and won’t face any additional fees. Even if they’re a one-person business, these companies operate independently from their clients and choose when, where and how they work.
All public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply.
If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply.
You may be affected by these rules if you are:
If assessed as inside IR35, contractors will need to pay the same income tax and NICs as if they were employed. However, they still won’t get any employment benefits, like paid holiday or sick leave, from the managing business.
Being assessed as inside IR35 can have a serious financial impact on the contractor and reduce their net income by up to 25%. Even worse, HMRC can go back at least six years and evaluate all contracts within this time to see if the legislation applies. As a result, contractors could end up owing hundreds of thousands of pounds.
Do check the gov.uk website for more guidance and to check your employment status tax: https://www.gov.uk/guidance/understanding-off-payroll-working-ir35
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