It all began with a press release back in 1999 called IR35, but it caused such a stir that it's become a term in its own right. But what exactly is IR35 - and why all the fuss?
IR35 was created in order to close a £900million tax loophole exploited by hundreds of thousands freelancers and contractors, and put an end to what the Inland Revenue saw as 'disguised employment'. This is the practice of permanently contracting or freelancing for an employer as a one-person service company, without paying income tax or National Insurance Contributions (NICs) at the same levels as other permanent workers. While in effect permanently employed, contractors working in this way were able to circumvent PAYE and distribute profits as dividends, which are not subject to NICs.
There are 12 IR35 Tests, which the Inland Revenue will apply to each individual worker to determine whether they fall inside or outside or IR35. In short, a contractual worker falls under IR35 if:
In the above scenario, the Inland Revenue states that the worker is effectively employed, but paying tax at the level of a self-employed worker - what they call a 'disguised employee'.
Many feel that IR35 is overly complicated and often unclear, leaving some contractors wrongly assuming they are outside of IR35. In these cases, all earnings of the intermediary company become subject to both PAYE and NICs - often meaning huge back payments.
Unless you're really familiar with the new legislation, it can be tricky working out if you're inside or outside of IR35. For more information or advice on the best way to ensure you remain IR35 compliant, call March Mutual today.