If you work as a contractor you’ve probably heard the term “IR35”, but what does it mean, how does it affect you and how can we help?
First things first, what is IR35?
IR35 - also known as ‘Intermediary Legislation’ or ‘Off Payroll Tax’ - was introduced in April 2000 in order to combat tax avoidance through the misuse of personal service companies (PSCs). The government made IR35 changes to the public sector in 2017 and will further reform the legislation for the private sector in April 2021 (this was due to be rolled out in April 2020 but has been deferred for 12 months following Covid-19).
So, what does IR35 mean to me?
If you are providing your services through an intermediary PSC, but would have been an employee of the end hirer had the intermediary not existed, this would be classed as “disguised employment”. The earnings of this PSC could therefore be considered a salary and income tax and national insurance contributions are payable – just like an employee.
In basic terms, if you are a limited company contractor working very much like a permanent employee of your client, then the HMRC believes that you should be paying the same taxes as an employee.
HMRC’s Goal?
The IR35 legislation sets out to ensure that contractors operating through limited companies (but working like employees) pay broadly the same amount of tax as they would if they were employed. Working as a contractor is often more tax efficient than working as an employee of a company, so the government is using IR35 to remove what is deemed an unfair advantage, and at the same time increase its overall tax revenue.
How?
The ambiguity of IR35 can make things super confusing, so HMRC have developed a ‘Check Employment Status for Tax tool’ (CEST) to help determine whether an employment relationship exists. This test should be used in conjunction with your written contract and day to day working practices with your end client, generating an overall picture of your engagement. When undertaking an IR35 assessment, there are two classifications; inside of IR35 or outside of IR35.
Inside IR35
To be operating 'inside IR35' means that you must pay the same tax as an employee.
Outside IR35
To be operating as a genuine business, and therefore operating outside of the IR35 rules.
What’s the impact of these changes?
IR35 will affect you as a contractor if you work for your own limited company. The new April 2021 reform means that the responsibility for determining IR35 will lie with the end client to make this determination. Put simply, every medium and large private sector business in the UK will become responsible for setting the tax status of any contract worker. You will no longer decide the status of your own contract!
How can we help?
Where this new rule applies, it is likely that end users of freelance contractors will refrain from engaging with PSC’s and instead, will request either an employment relationship - or that contractors are engaged via another type of intermediary, such as an Umbrella Company. If you are assessed as being inside IR35, you will be taxed in the same way as an employee, however you may not receive the statutory benefits that are associated with employment e.g. holiday, sick pay, maternity and paternity.
If you are paid through an umbrella company like Bar2, you can forget about any IR35 implications as you are already paid through the PAYE system and work under a contract of employment with us!
This opens up all of these amazing benefits…
- Holiday pay
- Pension contributions (employer and employee)
- Statutory sick pay
- Paternity/Maternity pay
- One employer for all your contracts
- Financial peace of mind – Tax and NI will be automatically deducted for you every payroll so there will no nasty surprises
- Payslips for proof of income such as credit or rent/mortgage applications.
- Flexibility – No fee’s when you’re not working
- Simplicity - No annoying Limited Company admin like Tax returns, VAT, bookkeeping, HMRC or Companies House submissions to name a few…!
- Friday payments
- No IR35 implications