IR35 – UK Contractors

The IR35 issue has become a big deal for UK based contractors, before deciding to contract you should make yourself aware of the implications IR35 can have on not only your income but also your employment.


What is IR35 and how does it affect UK Contractors?

“IR35” is a piece of tax legislation announced in 1999, which took effect from April 2000. The legislation means that the Revenue office can tax some UK contractors as though they are employees of their clients and not as self employed. Any UK Contractors caught by the IR35 legislation pay significantly more tax reducing their take home pay.

Why did the UK government introduce the IR35 legislation?

HMRC’s intention was to tackle tax and National Insurance (NIC) avoidance schemes through the use of intermediaries, such as Partnerships or Personal Services Companies (PSC).
HMRC’s view was that a large number of IT Consultants, Engineers, non-executive directors and “one man band companies” were often treated as self-employed when in fact they should have been treated as employees of the client. This was based on the terms and conditions that the contractors worked under, essentially your contract with the client dictates whether or no not you fall inside or outside of IR35.

Does the IR35 legislation affect all UK contractors?

Yes, in the sense that all contractors need to consider IR35 and take action to protect themselves from it. As mentioned above having a contract that falls within IR35 can seriously impact on your earnings as a contractor. Being inside or outside IR35 is not a black and white issue.

How can contractors determine if they are inside IR35 and not really self-employed?
The law for tax and social security legislation does not define ’employment’ and ‘self-employment’. Over the years Courts have considered the issue and their guidance on this issue is known as IR35 case law. Most contractor payroll service companies will be able to provide an assessment of your current contract as to whether or not you are inside or outside of the IR35 legislation. Many offshore payroll solutions for contractors provide their own new contracts that if acceptable ensure you fall outside of IR35.

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