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IR35 Tax Rules: A Guide to Compliance
09/04/2024

In the complex landscape of self-employment and contracting, understanding tax regulations is paramount. Among these regulations is IR35, introduced by HMRC to address tax avoidance practices and ensure fair taxation among workers. Let's delve into the workings of IR35 and its implications for contractors and clients alike.

 

Introduction to IR35

IR35 was enacted in 2000 to counteract tax avoidance by individuals providing services through an intermediary, such as a Personal Service Company, while essentially working as employees. The legislation aims to distinguish genuine self-employed contractors from "disguised employees" who exploit the intermediary status to minimize tax liabilities.

 

Why Was IR35 Introduced?

The introduction of IR35 stemmed from concerns regarding taxation differences between traditional employees and contractors. Contractors, operating through their own companies, often paid less in National Insurance Contributions and received income through dividends, resulting in reduced tax obligations. HMRC sought to ensure that individuals working as contractors were genuinely in business on their own account, rather than simply avoiding tax liabilities by operating as de facto employees.

 

Who May the Rules Apply To?

The IR35 working rules may impact:

  • Workers providing services through their own intermediary.
  • Clients receiving services from such workers.
  • Agencies or suppliers facilitating workers' services through intermediaries.

 

Signs of Employment vs. Contracting:

Determining employment status under IR35 involves assessing several factors, some of which are:

  1. Control: It is essential to demonstrate that the client has engaged the services of the contractor to provide a specialist service and that that contractor has autonomy over the way their services are provided.
  2. Mutuality of Obligations: Unlike employees, contractors should not be obligated to accept work offered by the client.
  3. Benefits: Entitlement to employee benefits like holiday or sick pay may suggest an employment relationship.
  4. Right of Dismissal: Contractors typically cannot be dismissed unless breaching contract terms. HMRC see notice periods as being indicative of employment however reasonable notice periods are considered defendable.
  5. Length of Engagement: Long-term engagements may resemble employment.
  6. Equipment: Contractors usually provide their own equipment.
  7. Personal Service: Contractors should have the option to delegate work, rather than being exclusively tied to perform the work themselves.

 

Consequences of Applying the Rules:

When the IR35 working rules apply:

  • The responsible party determines the worker's employment status for tax purposes.
  • The client must provide a Status Determination Statement explaining the determination.
  • If deemed employed for tax purposes, the client deducts Income Tax and employee NICs from payments to the worker's intermediary. Employer NICs and other contributions are paid to HMRC by the deemed employer.

 

Who is the responsible party for determination:

Before April 2021, the full responsibility for ensuring compliance with IR35 rules rested solely with the Personal Service Company. However, as of April 2021, the onus shifted to the organization receiving the worker's services, known as the client or engager, to determine the applicability of IR35 rules. However, in cases where an individual provides services to a “small” business, the individual remains responsible for determining whether their contract falls under the IR35 rules.

 

A small business for these purposes is one which has below:

  1. annual net turnover of £10.2 million
  2. A balance sheet total of £5.1 million
  3. 50 employees.

 

Conclusion:

IR35 represents a critical aspect of tax legislation in the UK, aiming to uphold fairness in taxation while curbing tax avoidance practices. Understanding the intricacies of IR35, conducting thorough assessments of employment status, and ensuring compliance are essential for both contractors and clients. With the potential for significant tax implications and legal ramifications, staying informed and seeking professional guidance remain paramount in navigating the landscape of contracting and taxation.

 

If you feel these rules may apply to you and want to know your position in relation to IR35 then look no further. We at Focus are proud to have partnered with Roots who can offer an independent status review. What’s more, if you go through the link on our website, you can claim 10% off your order! Just follow this link to get started: https://www.focusaccountancy.co.uk/ir35


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