If you’re working as a contractor, you’ve probably encountered IR35 legislation. It’s essential to know your IR35 status as you could face steep penalties for avoidance.
IR35 in detail
Introduced by HMRC, IR35 is designed to ensure that only properly self-employed people receive the relevant tax breaks. There are tax and National Insurance contributions regulations that may apply if you’re working for a client through an intermediary – like a limited company or agency – and you are deemed to fall within the scope of IR35.
Anyone who trades through their own limited company, but who would be considered an employee when they take on work for a client will fall within the scope of IR35.
If IR35 applies to you, all payments to the intermediary are seen as your employment income, with the intermediary liable for any required tax and National Insurance contributions. This means that you will pay roughly the same tax and National Insurance contributions as if you’d been directly employed by the client.
IR35 may also apply if you:
- Live or work abroad – this also applies to your intermediary/client
- Work in the construction industry
- Are an office holder
- Work with your partner or spouse
- Are engaged by a charitable organisation
What makes IR35 so complicated?
IR35 legislation should be simple, with the intermediary always responsible for ensuring compliance. However, as IR35 applies on a client-by-client and project-by-project basis, it can be difficult to get a clear answer. It’s possible you have to pay tax under IR35 for working with some clients but not others.
It’s best to consider taking out an insurance against unexpected tax bills, and to have your contracts reviewed by experts. We can point you in the right direction.
What happens if you get it wrong?
Ignoring or incorrectly adhering to IR35 legislation comes with significant consequences, including interest and penalties on further tax and National Insurance contributions, potentially going back years.
There are ways for contractors to avoid IR35, but your contracts must be set out in a specific way to take advantage of tax breaks.
What is HMRC doing to help?
HMRC has announced plans to introduce an online IR35 testing tool (the Employment Status Indicator), which aims to simplify the process. Through a series of questions, it will provide a “yes” or “no” answer as to whether IR35 applies. HMRC aims to have a beta version of this system by spring 2016.