Fundamentally, the dreaded term, ‘IR35’ is the name given to a tax legislation that is aimed at identifying individuals who are avoiding paying the tax that they should be. The IR35 legislation specifically challenges those people who supply their services to clients via their own company, often known as a ‘personal service company’, be it a limited company or a limited liability partnership, who, in the ever watchful eyes of HMRC, should be classed as ‘disguised employees’. This basically means that HMRC do not recognise the contractor in question as ‘self-employed’ from a taxation perspective and therefore they should be taxed the same way that a permanent employee should be, thus falling insider what is called IR35.
Seb Maley from leading IR35 advisory and contractor insurance provider, Qdos Contractor, describes IR35 as
“a bit of tax legislation which basically looks to differentiate between genuine businesses and workers, who are for all intents and purposes, a temporary employee. Unfortunately the legislation lacks clarity, and so it can be difficult to determine between the two, with a number of status tests which differ in importance, misinterpretation of case law even by HMRC themselves, and a general misunderstanding or appreciation of the self-employed workforce from Government policies, not to mention an outdated and over-complicated tax system. Whilst it’s not that straightforward, as long as contractors take due diligence through contract reviews and protect themselves with insurance, they can operate compliantly under the rules and have peace of mind – whether that is inside or outside of IR35.”
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Falling under the legislation could have a huge impact on a contractor, because if their position at a company is seen as being an employee by HMRC, they still would not be under employment by the company providing the contract, therefore not receiving any bonuses, benefits or ‘perks’ that employees often have. Basically, the consequences of falling under IR35 can result in significant financial penalties. Now, if you have already became confused with some of the terms used (which don’t worry, they can get confusing) then don’t panic, click on any of the terms used for full descriptions and explanations.
The general point of IR35 is to stop those who act like and are treated like employees pretending that they aren’t, therefore having the right to all the tax breaks that those working under limited companies receive, but also all the benefits of an employee. This is the core idea behind the term, a ‘disguised employee’.
*KEY POINT* IR35 has an impact on all contractors who fail to meet the definition of ‘self-employment’ made by HM Revenue & Customs, who are tightening their grip on all those who potentially fall inside IR35.