IR35 is a tax system in the United Kingdom that seeks to target to curb tax avoidance by people who offer services to clients through an intermediate party. This applies to situations where said parties would be employees if the intermediary did not exist. According to her Majesty’s Revenue and Customs, such people are disguised employees. If detected practicing this activity, the worker would have to pay regular tax as if they were employed. The financial ramifications of this kind of offense are significant, as you could forfeit up to at least 25% of your income. The limited liability company also losses in the thousands of pounds in additional taxes. Below is a brief IR35 history and overview.
History of the IR35
This law was introduced in the year 1999 and came into use in 200 as a constituent of the finance act. The legal name for this piece of law is the intermediary legislation. The government felt that the problem of disguised employment was becoming too common and it was missing tax revenues. In the stated scenario, companies would engage workers on a self-employed basis, mostly through an intermediary, hence bypassing regular employment rules that require the use of a tax compliant employment contract. At the end, the employee would pay much less in terms of tax than they should have done legally. One of the most obvious cases of avoidance is the Monday to Friday phenomenon, where an employee works for a company and then goes home for the weekend, then goes back to the office in the same company on Monday but in a different capacity, say, consultant.
The contract involved
If the nature of your contract essentially gives you the same tax responsibilities and benefits as those of bona fide employees of your client, then you are said to be inside the IR135, meaning that you stand to lose if the tax authorities come knocking. If you do not enjoy the benefits other employees of the client do, then you are outside this code and therefore not liable to penalties under the tax policies of the UK. Your job becomes an entitlement as you have forfeited benefits and job security and therefore are entitled to some breaks.
Determining if your contract passes
You could potentially sign a contract that places you inside the IR35 without your knowledge. You have to learn to differentiate a contract that keeps you out from the one that puts you in the crosshairs, meaning that you might end up paying a lot more than the regular taxpayer pays in your capacity. You can save yourself before this happens by having an IR35 review carried out. Almost all problems related to this law can be successfully corrected. This should happen in time before you go over the nitty gritty of the contract and renegotiate with your client or the agent involved.
The IR35 tax law has caused a lot of confusion to employers and contractors alike because of its complexity. Contractors therefore need to seek expert opinions regarding any contracts that they may want to take up in the future. This brief IR35 history and overview gives you the start you need, or please go ahead and use our IR35 Calculator to assess if you are at risk.