A Brief history and Overview of IR35

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 1RD35

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.

HOW TO DETERMINE WHETHER YOUR CONTRACT PASSES IR35

IR35 is a Finance Act, which was established and came into act in the year 2000. The main reason why it was introduced was to ensure tax payment by businesses which may not be genuine on the nature of their businesses, that is, they have contractors as employees. Ideally employees in these businesses should pay Income Tax and National Insurance Contributions as required by HRMC after investigations are one to determine whether they pass or fail the IR35. It has not been received well because it affects small businesses and it would cost them.

For people operating on their own accounts in business, here is a guideline on how to know whether IR35 applies or does not apply to you as a contractor;

  • – If the client controls how the contractor performs tasks assigned, then it may not pass the IR35. This means that, in a case where it is the client who comes up with the days the contactor works, the duration from starting time to ending time every day, and also has some statement defining that contract, the IR35 will be applicable.
  • – When a contractor is dealing with a client, there should be no any employment statement that should require the contractor to be the one always present for all the tasks. It is a business to business service, and therefore the contractor should be allowed to find a replacement anytime whenever necessary. Otherwise if there is clause that restricts such, it will mean that the IR35 is applicable because there is mutual obligation.
  • – If the contractor has to always take assignments from the contractor with no excuses, then that contract fails the IR35 test. But if the contractor can even receive contracts from other clients and maybe work on them the same time provided delivery is done as required, it passes the IR35 test.
  • – When it comes to payment, it should be in a form of a service fee not like an employee’s salary which is fixed, guaranteed and so it would definitely fail the IR35 test. This is because when a contractor is in an agreement with a client, finances are determined at the end of the contract, depending on the quality of work done, the amount of hours put in and the rate at which the tasks are carried.
  • – A contractor is required to use their own materials or tools during a contract. If there is a clause in the contract which stands for this, then it passes the IR35.
  • – A contractor has also to find out about the client and the kind of contract being issued by the client. Because there are cases where some contracts have been said to fail the IR35 but a client may bring it out after sometime under a different name. If taken, the contractors may find themselves in a trap and face the IR35.

Seeking advice before taking up contracts is very crucial to know whether you will be an employee or you are just a contractor to avoid suffering extra costs in your business. The nature of the relationship between the worker and the client will be used to determine whether the contract fails or passes the IR35.