IR35 refers to The Intermediaries legislation which was introduced in 2000. The purpose of IR35 is to help combat the avoidance of income tax and National Insurance payments for individuals using Personal Service Companies (PSCs). Individuals working through such intermediaries would otherwise have been regarded as employees of the client, with regards to tax and NIC purposes.
Before the introduction of IR35, individuals operating through PSCs could avoid being taxed as employees and paying Class 1 NICs on services they were providing through an intermediary.
The individual could withdraw money from the PSC through dividends rather than in the form of a salary. This resulted in the individual paying a decreased amount of NICs in comparison to an employee or sole trader, as dividends are not subject to the deduction of NICs, or PAYE.
IR35 is in force to ensure that if the individual was not operating through an intermediary and the relationship between the individual and the client would resemble one of employment, the individual would then pay the amount of tax and NICs which is deemed fair in regards to what an employee would be liable to pay.
When does IR35 apply?
IR35 can apply if you provide services to a client via an intermediary which is not a Managed Service Company.
Typically, but not exclusively speaking, IR35 applies when you personally provide services to another client through an intermediary, and additionally, in circumstances that rendered that if these services were provided directly to the client under a contract, you would have been viewed as an employee of the client for tax and NI purposes. HMRC also state that you ‘must receive or have rights entitling you to receive a payment or benefit that is not employment income.’
To determine whether your contract falls inside or outside the scope of IR35 legislation, HMRC have developed Business Entity Tests which help assess your employment status.
In addition, you should consult a qualified and reputable contractor accountant or umbrella company who will be able to advise you further.
How we can help
Here at K&B Accountancy Group, our qualified accountants are experienced with matters involving IR35 and the implications of such legislation on contractors’ business operations. In addition, our IR35 partner, Bauer and Cottrell, offer comprehensive advice and reviews on contracts and IR35.
If you would like further information on how we can assist you, call us today on 0207 078 0211, and one of our friendly and knowledgeable consultants will be pleased to assist you.