IR35, short for ‘Intermediaries Legislation’, is a piece of tax legislation introduced in 2000 to combat ‘Disguised Employment’. This is where a contractor is performing work in the manner of an employee, whilst working through a PSC (Personal Service Company) in order to gain tax advantages. The legislation aims to strike a fair balance between how contractors and employees are taxed, aiming to leave the tax advantages of a PSC solely to the genuinely self-employed.
Each contract you take as a contractor can either be ‘inside’ or ‘outside’ IR35. Being ‘inside’ IR35 on a contract means that the work you are doing is considered to be similar enough to that of an employer-employee relationship that the remuneration for that particular contract will have NICs and taxes taken by the client at the standard PAYE rate (like an employee). Being ‘outside’ IR35 on a contract means that the work you are doing is considered to be typical of a business to business engagement and the remuneration that you receive on that contract will not have been treated for NICs or taxes by the client, leaving you free to treat your taxes as you see fit.
In 2017, the government introduced the ‘off-payroll working’ reforms into the public sector. This reform to the IR35 legislation meant that the responsibility for determining the IR35 status of a contract was now on the clients that engage contractors. The reason for this was that there is a conflict of interest where a contractor decides their own IR35 contract status, as they are essentially deciding whether to be taxed at a standard-PAYE rate or whether to receive their gross pay and treat it themselves through a Ltd Company and retain more money. The estimated yearly tax loss for the treasury each year has been estimated at £1.3 billion.
These reforms have been seen to increase compliance with IR35 across the public sector, despite the legislation’s inherent faults and the increased burden on businesses. As a result, the government is now moving these reforms into the private sector. The result of this is that all contractors will lose the right to decide their own IR35 status, although they will retain the power to challenge a seemingly unfair status determination (SDS) from a hiring organisation. While the government has stated that they are looking to correct the issues caused by these reforms, which have been highlighted by key industry stakeholders and the House of Lords, there doesn’t seem to be much in the way to stop hiring organisations removing the IR35 liability by engaging all contractors ‘inside’ IR35. As this continues to happen across the country, less ‘outside’ IR35 contracts are being offered and, as such, the umbrella payroll route has become an increasingly popular alternative to allow the self-employed to continue contracting.
For all further information on IR35, our partners at Maven have kindly provided a ‘Contractor Guide to IR35’. Click on the link below to view –
We are fully compliant with IR35 legislation, the Employment Rights Act 1996 and the Agency Workers Regulations 2010. Compliance is of central importance of us, so that we can provide the most efficient and reliable service to our contractors, while ensuring the continuation of our charity profit donations.
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