Perhaps you’ve heard of IR35 but aren’t exactly sure what it is. Don’t worry, we have you covered. In the following post, we’re going to review IR35 and explain it in lay man’s terms. In addition, we’re also going to highlight how IR35 affects contractors.
IR35 is essentially just a tax code representing two different types of tax legislation that have been implemented since April 2000 as part of the Finance Act to battle tax avoidance by firms and employees hired by those firms acting through an intermediate. If you’re a person supplying services through an intermediary on behalf of a company then you are deemed an employee as if the intermediary didn’t exist in the eyes of the taxman.
Under the eyes of your majesty revenue and customs, you’re deemed to be an employee. As a result, you will have to pay tax like an employee. Unfortunately, the financial impact for contractors as a result of IR35 can be devastating. In fact, as a contractor, you would have to pay out an additional 25% of your earned income in tax. However, certain conditions exist as to whether or not you’re a “deemed employee” meaning that IR35 does not apply to every contractor. There are 3 conditions that determine employment;
- Control – How much control does the client have?
- Substitution – Is the work required by said person or could it be substituted by another individual?
- Mutuality of obligation – Is the employer obligated to offer work and is the employee obligated to carry it out?
If you meet all of the conditions outlined above then you will be considered a deemed employee nd are obligated to pay the tax outlined in IR35.
Overall, this is just a simplistic high-level overview of IR35. If you’re looking to find out more detail about contractor accounting please do not hesitate to get in touch.