Many contractors consider the IR35 as the worst piece of legislation. Dubbed as the ‘bane of many contractors,’ the IR35 has resulted to more contactors paying more taxes and penalties on their income. In fact, many contractors have listed it as one of the worst bits in their jobs. Introduced in April 2000, contractors IR35 has caused so much trouble to companies. This article is all about this controversial legislation and its effects on companies.
What is IR35?
Generally, the aim of IR35 is to prevent companies from not paying PAYE tax and National Insurance contributions by using intermediary companies composed of freelancers and contractors. IR35 was added to the statute of books for the sole purpose of determining whether contractors employed in a limited liability company can be considered as employees of a particular client rather than freelancers or contractors.
In order to avoid paying the normal PAYE tax and NIC, contractors provide their professional services to a client either through partnership or limited company. This way, they would save money as they would be paying significantly lower dividends and corporate taxes of partnership and limited companies. In response, Her Majesty’s Revenues and Customs or HMRC devised a way to determine whether these contractors were working for tax purposes or for national insurance where they would bd considered as a regular employee of their client. IR35 contracting draws a clear line between being a contractor and an employee.
Are You A Contractor or Employee?
Before you assume that your contracting status is clear cut, think again. The HMRC has become determined and ruthless in pursuing contractors who are trying to avoid paying taxes. As much as possible, you need to make sure about the true status of your contracting work because the HMRC will review your contracting status thoroughly. As a contractor, you will have to be clear in four areas namely risk level, responsibility, control, and liability. In order to determine whether you are a contractor or employee, the following questions need to be answered:
Do You Have Control?
How much control do you have over your own provision of services? Again, be reminded that your contracting status will never be completely clear-cut. You show be able to show HMRC that you have some level of control with your contracting status. This means that even if you offer professional services to others, you are still in charge of your work. There should be some proof of starting and finishing times.
Are You Vulnerable to Financial Risks?
Another thing you have to prove to HMRC to free yourself from IR35 is that you have the same financial risks as the other directors operating the company. If you are classified as an employee, you will not have any financial risks. On the other hand, if you are a director, you will have financial risks.
Can You Be Terminated?
If the client or company can end your working relationship with them, the HMRC deems it as an employer-employee relationship which means that the IR35 clause will be applicable.
Do You Own the Working Equipment?
The equipment is another important factor that HMRC considers in determining the applicability of IR35 to a contractor. If the equipment is provided by the contractor, then they are buying the assets in their own company which means that they are taking a financial risk. On the other hand, if the equipment is provided by the employer, then the contractor will fall under IR35 regulations.