What is IR35 and does it affect you as a business owner?
Following the Treasury’s hints that tax reforms could be extended into the private sector, Business Advice asks a question on many lips what is IR35 and who is affected by this change.
What is IR35 tax law?
IR35 was first introduced in 2000 as a way to combat tax avoidance through disguised employment. It dictates how freelancers and contractors are taxed when working for a public sector client.
The rules allow HMRC to look through? an intermediary, such as a Personal Service Company (PSC), and consider whether it is appropriate for the individual to operate in PAYE and pay National Insurance contributions (NICs).
Why was it introduced?
The system was introduced because individuals contracted through an intermediary were paying less in tax and NICs than they would as a direct employee.
HMRC was concerned that contractors were abusing the corporate? structure of intermediaries by resigning from their jobs, and returning soon after as a contracted worker with favourable tax and NIC rates.
The rumours of an extension into the public sector allegedly stem from the Treasury’s wish to level the playing field between public and private sector.
April 2017 reforms
Reforms introduced in April 2017 shifted responsibility of deciding whether IR35 was applicable away from individuals and onto the organisation.
HMRC expects the reforms to yield an extra 185m for the Treasury in the 2017/18 tax year.
Who is/could be affected?
Employee: If your roles and responsibilities as a contractor or freelancer working through an intermediary reflect that of a traditional employee, you would be subject to IR35 rules.
Employer: If you are paying individuals for their services through an intermediary, and their position is not classed as self-employed, then you would be required to make PAYE payments and NICs to HMRC on their behalf.
How does it work?
If you are considered to hold the responsibilities of an employee, the fee-payer (i.e. the organisation or agency) will calculate how much PAYE and employee NICs are payable, deduct them from the contractor fee and pay them to HMRC.?
Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.
HMRC's online IR35 status tool used by contractors to determine whether they should be classed as employed or self-employed, for tax reasons isnt fit for purpose, and could be facilitating tax avoidance. more»