Tax is typically a tricky topic to understand. Of course, the concept makes complete sense, but often the way it's explained leaves everyone feeling a little confused. Stuffy language, riddled with jargon is enough to put anyone off trying to get their head round.
So, in layman’s terms, here are the very basics of IR35 - the tax legislation introduced in 2000, that contractors need to be aware of.
What even is IR35?
IR35 is a UK tax legislation that affects contractors that don’t meet the HMRC’s guidelines for being self-employed. You’ll need to pay an increased rate of tax and National Insurance, so it’s important to find out your status if you want to stay out of trouble with the taxman.
To help, think of it like ‘disguised employment’. It’s to stop people getting the benefits of being an employee but without the same amount of tax. Because if you operate through an intermediary, you pay lower tax – 20%, compared to higher rates when you’re an employee.
Am I inside or outside of IR35?
Simple enough to find out you might think, but the hard part is making sense of HMRC’s ambiguous guidelines over whether or not you’re considered ‘self-employed’.
IR35 is aimed at those who HMRC might see as ‘disguised employees’, for example if you supply your services to clients through your own limited company. In the eyes of HMRC, this may make you an employee and IR35 is there to ensure that you’re paying the same level of tax as an employee does.
It’s unpopular because it’s unclear, ambiguous and badly implemented by HMRC. The guidelines don't set out in black and white what makes an employee. If you fall under Supervision, Direction and Control (SDC), essentially you're inside IR35. But what counts as SDC? Is it working hours? Working from the company office? And employee car parking spot? Invite to the Christmas Party?
With a reported 20% of contractors inside IR35, 20% outside, and a massive 60% unsure, such uncertainty only strengthens the case for massive reform.
Okay. What else?
IR35 might also apply if you work in the construction industry, are an office holder, work with your partner or spouse, work with a charitable organisation, or if you or your client are abroad.
And if I’m still unsure?
Like they always say, its better to be safe than sorry. It isn’t always straightforward to work out for sure whether you fall inside IR35 or not. So it’s best to get in touch with the professionals to avoid running into big problems further down the road.
Any IR35 questions? Ask away...