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A Guide to IR35
An Introduction to IR35
As a self-employed contractor, IR35 is an important piece of tax legislation to be aware of.
Perhaps one of the key things to understand about IR35 is why it was introduced. Prior to the introduction of the legislation, contractors operating as a Limited Company could obtain work directly from a client, in effect assuming the role of an employee. In some cases, contractors would resign from their place of employment, only to return and resume full responsibilities as a “contractor” the next week. This enabled them to receive the steady flow of work and benefits of working as an employee, with all the tax benefits available to contractors. In these cases, they were deemed by the government to be an employee of the client or agency and should, therefore, be subject to the same taxation.
The IR35 legislation was introduced in 2000, in a bid to counteract this sort of tax avoidance. Inland revenue argued that these contractors were “disguised employees” and should be subject to pay PAYE tax in addition to class 1 National Insurance (NI) contributions.
How does IR35 affect contractors?
For many contractors, IR35 can mean having to pay substantially more tax which in turn results in lower take-home pay.
In fact, some contractors can have their take-home pay reduced by as much as 25%. Prior to IR35, all contractors operating as a Limited Company could pay themselves with a low salary and the rest in dividends, which are taxed at a lower rate than salaried income. There is no National Insurance paid on dividends either. HMRC began to crack down on this “tax avoidance” by introducing IR35 and investigating contractors that could, in fact, be deemed, employees. For example, contractors that are the sole-employee of their limited company, conduct work on-site from the same client offices, and work at said offices during regular business hours are often investigated, as they could be carrying out the tasks of a regular employee under the guise of a contractor.
Of course, these sorts of working conditions can be genuinely required by some contractors. In a bid to determine which contractors meet the outlined criteria to be deemed self-employed and which would be deemed an employee of the client, a “test” was developed to determine if you are “caught” by IR35 or not. This is also referred to as being inside IR35, in which case you are subject to pay PAYE income tax and NI contributions, or if you fall outside, in which case you can continue to pay yourself in dividends.
If you are inside IR35, your income is taxable the same as an employee would be. It is common for contractors inside IR35 to work with an umbrella company, though some prefer to set up as a limited company owing to the amount of income taxable (95% versus 100% with an umbrella company). Being outside IR35 is generally considered to be the favourable, more tax-efficient option for contractors. Determining your IR35 status is important, but not easy and as such the legislation has been criticised by contractors and accountants alike. Working with an organisation that specialises in contractor tax issues can help you determine your IR35 status and help you ensure your contracts and working conditions are to your benefit to keep you “outside” IR35.
How Futurelink Group can help
IR35 affects all contractors, in that all contractors should be mindful of their status under it, which can often mean turning to a company that specialises in freelance and contractor tax solutions. At Futurelink Group, we have many years of experience dealing with IR35 taxation issues and have a comprehensive portfolio of services available to contractors working across all sectors.
Our team can help you run your business in the most tax-efficient way, whether you are inside or outside of IR35. We can help you determine your status by analysing your contract and working conditions, offering tax saving advice. If you are found to be inside IR35, we have an umbrella company solution that is popular with contractors. We can set you up quickly so that you are able to receive PAYE earnings, along with other benefits of being a full-time employee, whilst retaining your status as a contractor.
If you are outside IR35, we can help you establish your Limited Company. With our Limited Company services, you receive access to our team of experienced accountants, as well as tax advisers that can help you process your earnings in a way that’s efficient and compliant. It’s also fast and simple to transfer your existing Limited Company to us. We’ll let you know what paperwork we need, and once it has been supplied to us, our friendly experts will take care of the rest.
We can also assist with business entity tests, which are tests comprised of 12 questions that are designed to determine your IR35 status. The results of these tests are important, and will play a large role in not only how your earnings are processed, but if you may be subject to investigation by Inland Revenue. Based on the outcome of these tests, your business will be deemed low, medium or at high risk of being inside IR35. In any eventuality, Futurelink Group has a team that can offer affordable solutions to help. We appreciate that even for established contractors, IR35 can be confusing and hard to navigate.
At Futurelink Group, we pride ourselves on providing jargon-free advice you can really count on.
We hope that you have a better understanding of your status. If you have any questions around IR35 then please give us a call on 01923 277900 or request a call back by clicking the button below.