IR35 Accounting

All contractors need to consider the IR35 issue.

What is IR35?
“IR35” is a piece of tax legislation announced in 1999, which took effect from April 2000.

The legislation means that the Revenue can tax some contractors as though they are employees of their clients.

Contractors caught by IR35 pay significantly more tax reducing their take home pay by up to 25%.

Why did the government introduce IR35?
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).

Contractors often use the Limited Company as a PSC to obtain work either direct from an end client or via an agency.

The Revenue’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 end Client. This was based on the terms and conditions that the Contractors worked under.

The Revenue argued that if the agency or the PSC were removed, a large number of contractors would really be “disguised employees” who should be included on the client payroll and have tax and NIC deducted each month.

The Government announced the “rule changes” which took effect from 6 April 2000. The first reporting and payments happened from 19 April 2001.

Does IR35 affect all contractors?
Yes, in the sense that all contractors need to consider IR35 and take action to protect themselves from it. However, not all contractors are caught by IR35.

What happens if you are caught?
If you are “caught by IR35”, then all fees are considered “deemed salary” through your PSC and Tax and NIC will need to be deducted similar to an employee.

For a contractor on £40 per hour this equates to around £800 per month.

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