The IR35 legislation specifically challenges those individuals who supply their services to clients via their own limited company, often known as a ‘personal service company’.
When trying to understand what is IR35, IR35 is the official industry name given to laws set out in the Finance Act 2000. The legislation is intended to prevent individuals from avoiding tax by ‘disguised employment’ - working as self-employed contractors through their own Limited Company even though they do the same job and operate under the same constraints as an employee.
The legislation states that any contractors that are in fact ‘disguised employees’ should be subject to the same Income Tax and National Insurance Contributions (NICs) as regular employees and no be able to access the benefits and tax breaks typically available to contractors working via their own limited company.
In other words, the legislation ensures that if the relationship between the worker and the client would have been one of employment if it wasn’t for the intermediary, the worker pays tax and NICs roughly equivalent to an employee.
If HMRC decides that your contract puts you within IR35, you’ll have to pay tax and National Insurance like an employee, rather than taking your director’s fee and dividends. So it’s important to make sure you’re entitled to every penny you take from your company.
For example, an IT technician might leave their permanent job on the Friday, only to return on the following Monday as a contractor, performing exactly the same job in the same was as they did before but working via a Limited Company intermediary. This would be deemed as ‘disguised employment’ from an IR35 perspective and therefore the individual would need to be taxed as an employee.
As a contractor your IR35 status effectively determines your tax position with HMRC. Contractors working through a Limited Company, who fall outside IR35, are entitled to receive payment in the form of dividends. Those who fall inside IR35 are regarded as ‘disguised employees’ for tax purposes and are only entitled to receive payment on a PAYE basis
Employment status is a complex assessment requiring professional, specialist knowledge and experience to undertake reliably. Brookson offer a review of each new assignment contract and working practices, as well as conducting reassessments of existing assignments in its services, inclusive of each monthly fee
For more information, download our FREE guide to IR35 which includes details of the changes made to IR35 in the public sector or get in touch with one of our specialist team.
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