You are considered an employee for tax reasons if your contract comes inside IR35, an off-payroll working provision. For tax reasons, the IR35 standards determine whether or not a contractor is a “true” independent contractor rather than a “disguised” employee. Tax benefits are available to contractors who operate via a limited liability business. They have a lot of freedom and control over their job and may choose when they work.
To combat what it refers to as “disguised” employment, HMRC implemented ir35 in 2000. Working as an employee instead of an independent contractor is a common tactic used by certain contractors. Because they don’t have to pay National Insurance payments or provide contractors employee benefits, firms may save money by recruiting employees this way. The tax advantages for contractors are significant.
When contractors work with customers, IR35 determines whether they are, in fact, employees. Because HMRC considers contractors who fall “within IR35” to be employees, they are subject to taxes and benefits as full-time workers. If you’re “outside IR35,” you won’t have to deal with this. Many people find the law difficult to comprehend. Even HMRC seems to be having difficulty.
IR35 Rules
When evaluating whether a contract or engagement falls under IR35, “you must figure out the individual’s employment status delivering their services.” According to HMRC, off-payroll regulations apply to contractors who would otherwise be employees. In many circumstances, the middleman is a limited liability business formed by the contractor (often called a personal service company).
It’s called the “intermediaries law” because it applies to employees who supply their services via a third party rather than as an employee. As previously stated, the contractor’s own limited business or personal service company is often used as an intermediary. A personal service business is a limited liability corporation in which the only director, the contractor, controls the majority of all the shares of stock.
After that, the contractor provides the requested services to the customers. However, the government of the United Kingdom claims that alternative middlemen are possible:
- Another personal service firm and an individual are all examples of partnerships.
- A contractor may either give their services directly to customers, or they can work through an agency.
From April 2021, private sector modifications will be implemented, and the definition of a small business has been included and specifics on the client-led dispute procedure. To ensure that contractors who would be workers if there was no intermediary pay the same amount of tax as employees, HMRC implemented the IR35 regulations in 2000. In other words, if a contract is under IR35, you must pay income tax and NI as an employee would.
There are distinct restrictions for working with public and private sector clients:
- Your final customer will determine your IR35 status if you are a public sector contractor. That implies they’ll utilize HMRC’s CEST or an independent agency to determine their status.
- Your IR35 status is up to you as a private-sector contractor. However, this will change in April 2021, when medium-sized and larger customers will be responsible for deciding whether or not you fall under IR35. Payroll tax and National Insurance payments will be deducted from your final paycheck by your end-client
