What is IR35?
IR35 is an abbreviation used for Intermediaries Legislation since April 2000. The Intermediaries Legislation abbreviated as IR35 and HM Revenue and Customs (HMRC) have used this abbreviation to identify a contractor as a real contractor or is a “disguised” employee to avoid the tax payment.
Contractors who are employed in the format of the limited company enjoy some degree of tax efficiency; however, they are not eligible for employee benefits (like holiday and sick pay). Still, they exercise full flexibility and control over their work. The IR35 aims at the detailed analysis of the following:
- Private sector IR35 reform for the self-employed set for 2020.
- Eligibility of HMRC in the pretext of investigation of your finances without your permission
- Cover provided by professional indemnity insurance
- Ways to get recognition as an IT contractor in the UK.
ALL that you need to Know about HMRC and IR35:
HMRC brought in to notice the IR35 in 2000 to deal with the issue of disguised employment. A few contractors and their heirs took advantage of working through a limited company as a contractor whereas, in reality, they are an employee of the company, to enjoy the benefits of saving taxes. The benefit so rendered to the contractor is for tax efficiency.
Thus the purpose of IR35 is to identify whether the contractors are for all reasons and intents are the employees of the company when hired for work by the client.
Implications of being in IR35:
If you fall into the category of IR35, then HMRC considers you as an employee, and you are to face an income tax and National Insurance burden, similar to that of other employees. If you fall out of IR35, then there is no tax burden on you.
For some to understand the whole legislation is a complicated task. The same is the situation with HMRC, and as per records their successfully fighting IR35 case at the tribunal proves this fact. There is a very foggy and unclear insight on this tricky topic. The status of employment matter states the guidelines is itself quite controversial ever since the law was first introduced.
IR35 Regulations and its accuracy:
HRMC has a tool to assess whether IR35 applies to a contract (CEST or the check employment status for tax’ tool and an IR35 helpline. In reality, IR35 relies upon the cases that have been heard in the courts of the UK. Also, the accuracy of HRMC, s CEST tool is not cent percent accurate as it does not consider the vital part of the case that is Mutuality of Obligation or MOO in its consideration.
IR35 Rules for the Public sector and Private sector Companies:
There are different for public sector and private sector companies.
- Public sector- here the hirer is responsible for figuring out whether the contractor falls in IR 35 or not. If yes then the hirer or the third party who makes the payment then needs to deduct the tax and pay the NICs due.
- Private sector- here, the contractor needs to figure out whether they fall inside the IR35 or not. If yes, they have to pay for taxes and the dues of NIC.
How to decide your status in terms of IR35?
General Law claims that if you are a contractor for services, then you are not an employee, and here are a few principles that will help you ascertain your status concerning IR35.
- Mutuality of obligation (MOO) – There is an involvement of obligation which means that if the employer offers you work, it needs to be done.
- Substitution - you fall under IR35 if in your place someone else cannot do the work.
- Control, Supervision, and Direction - if the client has control over your work timings, then you tend to be an employee.
It is better to start your work with full clarity and clarify your status concerning IR35.