Why Contractors And Freelancers In The Uk Need To Know About Ir35
Most contractor accountants should be very well informed about IR35
, and they will be up to date with all the current legislation.
IR35 is legislation that is contained in Chapter 8 of ITEPA 2003 that says that if a worker who is supplying a service personally is a disguised employee of the client then the worker should be suffer tax and national insurance on the same basis as other employees.
So this legislation ignores the fact that the worker may be working for their own Limited Company and focuses on the arrangements under which the worker is supplied.
It does not make any difference if you are working through an Agency or Staffing Company either, the legislation interacts with Chapter 7 of ITEPA 2003 which basically says that if an Agency engages a worker then they have to apply PAYE unless the worker is engaged through a Limited Company.
This legislation applies when the worker is engaged through a Limited Company, and the worker (and their associates) has a shareholding of 5% or more.
If the worker is working with an Umbrella Company then they will not own 5% of the shares so IR35 does not apply, but the Agency Legislation does still apply.
In effect what this means is that any Professional Contractor and Freelancer who runs their own company should be aware of this legislation as it does apply for each and every engagement that you take on, whether direct for a client, or though a staffing company.
The effect of a contract being caught by the legislation is that the Intermediary (your Limited Company) is required to calculate a Deemed Payment, on which PAYE and National Insurance is applied.
So how you could be caught by this legislation is the thing that all UK Contractors and Freelancers need to understand in order to ensure that they are HMRC compliant. Contractor accountants can help and guide you with this.
Not being HMRC compliant means that you may face an unexpected tax bill, years after you complete a contract.
For a contract to be caught by the legislation it needs to be shown that:
"The circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client."
This is an important point to be remembered.
A contract caught by the rules is one where the engagement is one of employment.
This would be a contract "of service"
Therefore:-
A contract that is outside IR35 is one where the engagement is NOT one of employment.
This would be a contract "for service".
For the sake of clarity there is no need to prove self-employment for the contract to be outside IR35, you need to just prove that the contract is NOT one of employment.
This difference is slight, but vital!
So all contractors and freelancers in the UK need to be aware of what tests will be applied to see if these rules apply to their engagement.
It is not just enough for the contractor to think their Agency or Client will know the rules and organize things in their favor. The contractor themselves can be personally liable for the unpaid tax if the contract is shown by HMRC to be inside IR35.
Apart from knowing what the rules are and how they are applied, it is a good idea to get your contract checked by an IR35 specialist.
Contractor accountants should be able to help you with this and they can guide you on your final decision as to how to apply the rules in your case.
by: Sally Fletcher
Rehabbing with Contractors Austin Roofing Contractors