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What is IR35? IR35 is an important piece of intermediaries legislation that governs how tax is paid when working with contractors. If your business has appointed contractors or freelancers working through an intermediary, you need to know how IR35 works.
As a business, ensuring that your recruitment activities are conducted in full compliance with all relevant tax legislation should always be seen as a top priority. This means keeping abreast of the latest developments in tax law, and making sure that your organisation has updated its policies accordingly.
IR35 is a good example of a recently updated piece of tax legislation, which was first introduced in 2000, that has had a significant impact on off-payroll working rules and the way that professionals work through intermediaries. If your business regularly works with contractors or intermediaries, it is essential that you have a good understanding of how IR35 works.
Here, we will examine the basics of how IR35 works, how IR35 status is determined, and how to factor these responsibilities into your recruitment activities.
IR35 is the commonly used name used to describe the revamped system of off-payroll working rules for businesses, contractors and their intermediaries. The overall aim of this piece of tax legislation is to combat tax avoidance. It prevents companies from engaging contractors on a self-employed basis to ‘disguise’ their true employment status, and thereby avoiding paying the right amount of income tax.
In the past, it was possible for individuals to pay a lower rate of income tax by supplying their services to clients through an intermediary or their own limited company, rather than being on the payroll directly. Businesses would also take advantage of this ambiguity by avoiding having to pay National Insurance Contributions (NICs) for these ‘disguised employees’ or provide benefits such as paid holidays, pensions or sick pay.
IR35 closes this loophole by making it a requirement for off-payroll contractors to pay broadly the same Income Tax and National Insurance contributions as employees, if it can be shown that they would have been classified as employees if they were providing their services directly to the client.
The name ‘IR35’ is not the official name for this piece of legislation - instead, it refers to the name of Inland Revenue (IR, now renamed HM Revenue & Customs) and the number of the press release used to announce the original version of the law back in 1999.
Under the IR35 rules, contractors and self-employed workers who are supplying services to a client will be classified as being either inside IR35 or outside IR35. If they are inside IR35, it is deemed that they operate equivalently to employees and should therefore be taxed accordingly; if they are outside IR35, they are seen as being legitimately independent professionals who can pay tax at a lower rate.
A number of factors may determine that a contract should be seen as being inside IR35, including:
Meanwhile, the following factors may indicate that a contract can be classed as falling outside IR35:
Examining all of these factors will provide clarity on what the worker's employment status should be under IR35, and ensure that tax deductions can be calculated accordingly.
One of the key tenets of current IR35 legislation is that organisations which contract workers to provide services through their own intermediary are responsible for determining whether the rules are applicable in their own case. This used to be the responsibility of the individual's limited company, but the duty has now become the client's responsibility in the majority of cases:
As such, any organisations that are utilising self-employed contractors as part of their recruitment strategy need to ensure that they fully understand their responsibilities under IR35, including how the employment status of these contractors might affect their tax liabilities.
If you would like to know more about IR35 and how to ensure that your recruitment activities are fully compliant with all relevant tax and national insurance rules, get in touch with Sellick Partnership here.