what to know about IR35
IR35 is actually a tax-legislation that is meant to eliminate any tax avoidance by workers who supply their services to customers through an intermediary such as a company with a limited liability, which can also be an employee without the use of an intermediary. According to Her Majesty’s Revenue and Customs (HMRC), such workers are referred to as disguised employees and if such workers are found out by IR35, then they are ought to pay income tax and National Insurance Contributions (NSICs) as if they were registered as employees. Normally, the financial impact of IR35 is usually very significant because it can reduce the net income of a worker by up to 25%, thus causing a lot of expenditure to the typical limited company-contractor with an inclusive of additional income tax and NICs.
IR35 was introduced in 1999 as a tax law and is popularly known as Intermediaries Legislation. This tax law came into force especially in April 2000 as an integral part of Finance Act. IR35 takes its name legally through a press released which was published by Inland Revenue which is currently referred to as Her Majesty’s Revenue and Customs (HMRC). The element, income tax, under the Intermediary Legislation has been subsequently integrated into the Income Tax (Earnings and Pensions) Act 2003-(ITEPA 2003), while the NICs element becomes part of Social Security Contribution (intermediary) Regulation-2000.
Though IR35 has been in force since 1999, it has frequently faced a lot of criticisms from tax experts and business community as not perfectly conceived, poorly implemented by HMRC body and causing unnecessary and irrelevant costs and hardships to genuine small business. IR35 was introduced by the government to help in tackling the issue of disguised employment. This is a situation where organisations engaged its workers on a basis of self-employed via an intermediary instead of an employment contract, thus being perceived as disguised employees.
Organisations engaged in such kind of disguised employees helps them in saving a significant amount of money as they cannot pay employer’s NICs, and it also implies that they do not need to provide any possible employment rights or benefits. IR35 therefore, should have the responsibility of defending workers’ rights from unscrupulous-employers and the Exchequer from lost tax-yield. This main aim has not yet been achieved by the legislation.
Basically, IR35 seeks to make a legitimate one person-small business, into being a real employee. This issue was actually underpinned by employment legislation and IR35-case law.IR35 works by allowing the HMRC inspector to assume the written contract that exist between the worker and their clients and ensure that the actual nature of the working- relationship is used in order to create a notional contract. The inspector or a tribunal judge will then apply this notional contract to determine if the contract is part of employment when IR35 applies or part of business to business service where IR35 does not apply.
There is a need of an expert knowledge of employment law to properly interpret these tests because a mere judgment made either by independent professionals or HMRC’s tax inspectors may incorrectly interpret them, thus leaving contractors without proper understanding about their tax status.