IR35 is the UK’s latest anti-avoidance tax legislation. The legislation is designed to assess whether a worker is a contractor or a ‘disguised’ employee. ‘Disguised’ employees refer to workers who receive payments from a client via an intermediary, like their own limited company, but who would be an employee if the intermediary was not used.
It is designed to tax ‘disguised’ employment at a rate comparable to that of employment. This means those workers cannot benefit from the tax efficiencies they may have had as a ‘disguised’ employee. The rules of IR35 differ for the public and private sector.
The contractor’s client must determine whether IR35 applies. If they decide it does apply, they will place the contractor onto their payroll. As such, they will receive payment deductions like income tax and National Insurance.
Workers are liable to check if they fall into the IR35. If they do, they make the consequent deductions of income tax and NI. Similar to the public sector, the responsibility of operating ‘off-payroll’ working rules will be on the organisation. This will be introduced by April 2020.
When does it apply?
- Substitution – does the contractor have to carry out the work personally?
- Mutuality of obligation – is the client required to provide work and/ or is the contractor obligated to carry out work the client requests?
- Control – how much control does the client exercise over the contractor, how, when and where the contractor carries out the work?
Failure to adhere to IR35 can cause up to 25% more tax and NI contributions per year. As such, HMRC may also charge interest on said tax and contributions. If the contractor is considered to have been negligent in declaring their tax status they will be liable to pay a fine of 30% of any unpaid tax.
The penalty can increase to 70% of the unpaid tax if HMRC can prove that IR35 rules were ignored. Equally, if a client in the public sector deems a contractor breaking IR35 they will be liable to pay taxes and NI contributions to HMRC plus additional penalties.
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