In April 2017 IR35 underwent some changes that were confined to the public sector. Now the new legislation is set to affect the private sector as well, meaning it’s more important than ever to understand this complex law. Here is what you need to know and why getting the help of an accountant from Berley is vital.
What is IR35?
The Intermediaries Legislation was initially introduced in 2000 to combat ‘disguised employment’, where an individual can avoid tax by supplying services to clients via an intermediary, and would be an employee if the intermediary were not used. Simply put, disguised employees are those who do employee work under the title of contractor, to avoid paying certain taxes.
The most commonly cited example is the ‘Friday to Monday’ worker, where an employee leaves a company on Friday and returns to the same job as a contractor on Monday, paying less tax as a result. IR35 is designed to identify disguised employees and tax them accordingly as if they were employees.
There are three tests of employment to determine whether someone is a disguised employee rather than a genuine contractor:
- Control – If a client specifies where, when and how the contractor is to complete the tasks allocated on their contract.
- Substitution – If a contractor cannot send a replacement, or a substitute, to complete the tasks for the client on their behalf.
- Mutuality of obligation (MOO) – If a contractor expects the client to give them work, and the client expects the contractor to complete it.
If any of these apply to a contractor then they are considered to be under IR35. Although several other factors can determine employment, in a courtroom these three are the most important.
What happens if you fall under it?
As a contractor, the main effect is a sharp increase in the tax you will pay, due to being classed as a disguised employee. Employees must pay both PAYE and National Insurance tax and you will be required to make up for any tax you would otherwise have paid in the form of ‘deemed employment payments’. The method of calculating these payments is very complicated, so it’s advisable to seek specialist help. Our accountants can work out the payment and show you exactly what you must pay.
You can also calculate the effect falling under IR35 has on your income using this calculator.
What can you do?
Falling under IR35 is quite expensive in terms of extra tax but provides none of the benefits of full employment, although thanks to a recent tribunal case this may soon change. For many, it is simply a case of working around the legislation. However, if you feel you have been wrongfully categorised, then you do have the option of taking the matter to court.
Of the previous 24 court cases concerning IR35, HMRC has won around half of them. This is primarily due to the inaccuracy of the Check Employment Status for Tax tool (CEST) – HMRC has admitted it does not take into account MOO, despite also stating that only assessments conducted using it will be recognised in court. Thus the success rate for these kinds of cases is relatively high.
Furthermore, due to the heavy penalties in place for knowingly avoiding tax under IR35, some companies have foregone assessing contractors individually and just assumed that all their contractors operate under IR35, a so-called blanket approach. In these cases requesting an individual assessment can properly determine whether you are inside or outside of IR35.
One final option that is becoming increasingly popular is to move to an umbrella company. Although working in an umbrella company means you must pay taxes equivalent to working inside IR35, you are also allowed to claim certain valid expenses that can mitigate the amount owed. Therefore the overall pay you take home is higher.
Get help from Berley
Some of the IR35 calculations are incredibly complicated. For example, calculating the deemed payment involves 11 separate stages, some of which are recursively dependent on others. Also, it’s known to affect small businesses – who are more likely to hire contractors for jobs – far more than large ones. In short, it’s a minefield for you and your income, but not an impassable one. At Berley, our specialist accountant contractors can help you navigate this legal maze.
To let us show you the way, get in touch on 020 7788 8261 or fill out our Online Form.
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