Limited Company Ir35 Rules

Within the contracting profession there are a number of tax issues that must be taken

into consideration that average PAYE employees are not affected by. As most already know, UK contractors have a far lower tax bracket to that of employees, thus making their take home pay far higher due to not paying as much tax. As a result of this, HM Revenue & Customs obviously keep a close eye on the tax system regarding contractors, and in true tax office style, come down hard on those they may suspect of tax avoidance.

Contractors are professional individuals who operate via their own limited companies, and offer their specialist professional services to larger firms and businesses on contract bases. Because contractors work for their own limited companies as opposed to being an employee of the company hiring them, the tax office claims a much lower percentage of tax. The IR35 legislation is an initiation designed to prevent tax avoidance amongst the contracting community because of their substantially low tax bracket. Its formal issue was stated in the year 2000, after there were an increasing number of normal employees posing as limited company contractors to claim the lower tax margins. Because of this, HMRC issued the IR35 legislation as a means to combat these employees who posed as contractors.

IR35 is designed to combat the concept of the 'disguised employee', and is based on discerning the professional status of those claiming to be contractors who may in fact be average employees hiding their employment benefits from the tax office. IR35 calculates a contractor's credibility through a number of different means, but all try to accomplish whether or not a professional is treated as an employee or a contractor. This can range from receiving paid leave and bonuses (employee) to having sufficient control of your contract (contractor).

The effects of being found within IR35 can be devastating to contractors, HMRC being able to claim a substantial percentage of all money earned during a contract as back taxes and wrongly distributed funds. Being caught within the legislation's rules can have further devastating effects on a contractor's reputation and thus ability to work on future legitimate contracts.

In recent years there has been a certain lull in respect to the number of IR35 investigations carried out by HMRC, the numbers dropping from hundreds when it first began to as little as in the 50s. Having said this however, due to recent updates to business entity tests and statuses regarding public sector workers, HMRC have rekindled their efforts into tackling disguised employees and investigating IR35 cases.

IR35 insurance and advice exists to aid combating any potential enquiry both financially and legally, and assurance is advised regarding any IR35 matters if not only to provide complete peace of mind. It is strongly recommended that any contractor who has any concerns or worries regarding IR35 rules or their professional position consult an IR35 specialist immediately and research their position using the business entity tests and/or IR35 calculator.

by: Chris Carvill

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