subject: Ir35 Explained [print this page] Contractors, being professionals working through their own limited companies do not fall under the same tax brackets of normal working employees. Contractors may well work for a company, but are not technically employed, as they are in fact self-employed specialists who are engaged on relatively short contract bases. This means that these contractors are not affected by many of the benefits and downsides that come with being a permanent company employee. Contractors are not tied into a permanent role at a permanent company, and technically can work whenever they like (as long as they get the job done) which is a huge plus in today's busy business society. Possibly the main perk that contractors benefit from however, as mentioned previously, is that they do not fall under the same tax bracket as employees, therefore pay far less tax. Because of this advantage, the take home pay of a contractor working for a company would be far more than an employee.
It is as a result of this that the IR35 legislation exists. IR35 is the HMRC's way of making sure that these contract workers who are paying less tax than the employed working community are actually what they say they are (contractors) and not in fact employees posing as contractors to avoid paying more tax. This notion is called the 'disguised employee' and is what the entire IR35 is based on.
More and more often, people who are avoiding paying sufficient tax posing as contractors are actually benefiting from all the perks and advantages as an actual employee. These disguised employees would receive company benefits and welfares whilst still being treated by the tax office as contractors.
If a contractor falls under the IR35 legislation, they are seen as HMRC as being employees, and not contractors, and as a result, all of the income earned for a contract would be classed by the HMRC as a 'deemed salary'. This basically means that income tax and National Insurance Contributions (NIC) would be taken, in other words, treating the contractor as an employee when it comes to tax deductions.
This may not sound like the end of the world for contractors as they receive high earnings for their contracts as it is, but to put it into a bit more perspective, if a contractor fell inside the IR35 legislation, they would be expected to receive up to 25% less pay than another contractor who wasn't. This is because they would have to pay far more tax and NIC than another contractor, making their 'take home pay' far less.
The biggest downside to falling within IR35 would be that the tax payment to HMRC would be from whenever the contract started, and for a 12 month contract on 100 a day, the financial consequences of falling within the legislation could well be devastating. There are a number of different ways in which contractors can avoid being caught within IR35. Successful contract reviews can prevent any HMRC scrutiny and proper IR35 insurance can certainly take the weight off the contractor.
