contractors IR35

Understanding Tax Legislation for Limited Company Contractors

You often hear about IR35 but you only get the gist of it. It is a tax legislation that is created to battle tax avoidance by workers giving their services to clients through a Limited Company. IR35 was introduced in 1999 but imposed in 2000 as part of the Finance Act. Here are other things that you should know about IR35:

Why was IR35 introduced?
You have to know that contractors who fall outside IR35 are entitled to receive payment in the form of dividends. For those who fall inside IR35, they considered “disguised employees”. These employees are entitled to receive payment on PAYE (Pay As You Earn).

IR35 contracting

IR35 was introduced to solve the problem of “disguised employment”. This happens when companies involve workers on a self-employed basis through an intermediary instead of giving employment contract. With this action, the company can save a significant amount of cash because they do not need to pay the employer’s NIC (National Insurance Contribution) and they do not offer employment benefits.

Simply put, IR35 defends the rights of the workers from ruthless employers at the same time recover lost tax yield.

What are the principles to determine employment status?
There are three principles to determine employment status – control, substitution, and mutuality of obligation. There are also factors that determine whether you are caught by IR35. Factors include contract type, if you are taking a financial risk, and if you are part of the organization.

What if the IR35 applies?
If IR35 applies, the law made a provision for paying Income Tax and NIC. You have to know that HMRC (Her Majesty’s Revenue and Customs) can trace back at least 6 years and evaluate your past contracts to determine if IR35 still applies. This means that HMRC can demand Income Tax and NIC with interest and penalties for the past 6 years.

How to show that you are not a “disguised employee”?
Here are some tips to show that you are not a “disguised employee”:
• You need to ensure that your contracts are consistent and accurate. You have to

check the contract between the agency and the client to make sure that it does not contradict your contract.
• You need to provide a substitute. Remember that providing a substitute is evidence that you are not obliged to offer personal service. This will give you the flexibility to work on another contract or supply cheaper labor to execute services on your behalf.
• As an independent contractor, it is important that you determine the hours necessary to complete the work. You have to show that you are in control of your assignments. Do not rely on allocated work.
• To demonstrate easily that you are self-employed, you have to show that you work for many clients. Having one client as the sole source of your income for a long period of time suggests that you are employed. To counter this, you have to provide your own equipment and pay for your own training.

If you are having a hard time understanding or complying, you should look for IR35 contracting experts to help you.

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