The complex legislation known as IR35, introduced in April 2000, is aimed at contractors who are working through a limited company as self-employed, but may be deemed to be ‘employed’ by the clients.
For instance, a person could leave their employment one day and return to the same ‘employer’ the next, only this time on a self-employed basis. They would be providing the same service as previously, but wouldn’t be subject to PAYE. This results in the person paying less tax. However, you could be caught within IR35 even if you are genuinely self-employed and working through a limited company.
Who could be affected by IR35 legislation?
In theory, anyone who is working through an intermediary could be caught by IR35. If you don’t fulfil the definition of being self-employed, according to HMRC, you could fall foul of the legislation. If you are supplying a service for a client but are treated as an employee, you could become the subject of an investigation by HMRC. It is possible that you could be caught by IR35 for a particular contract or project, so you may have to pay a ‘deemed payment’ for some clients and projects and not others.
How do you know if you’re an employee?
It is crucial for contractors who work through a limited company to remain compliant with HMRC regulations, to avoid becoming the subject of an IR35 investigation that could lead to them having to pay the deemed amount.
HMRC introduced business entity tests in 2012 to help contractors decide whether they would be likely to become a target for HMRC IR35 investigation or not. A series of tests would be scored, with the results leading to a low, medium or high risk. However, the tests were confusing for many and have now been withdrawn by HMRC. If you outsource management accounting services, your accountant will be able to advise you.
What happens if you fall within IR35?
If IR35 applies to you and HMRC believes you are an employee rather than a contractor, you will have to pay a ‘deemed payment’. This compensates for the National Insurance you would pay as an employee through PAYE. The calculation is relatively straightforward, although you may need professional advice to ensure the payment is correct.
As IR35 is so complex, it is likely that you will require more information and guidance on the topic. Give us a call to find out whether or not you could be affected by the legislation.