All you need to know about IR35
Figuring out IR35 can be confusing. When working as a contractor, it is important to understand whether or not you are in or outside IR35. In this blog, we are going to help you understand everything to do with IR35.
What is IR35?
IR35 is a piece of tax legislation, it was introduced in the UK in 2000. The legislation was created to combat people avoiding tax by working as self-employed contractors through an intermediary limited company. Workers could previously set up a limited company structure to be able to pay less tax.
Who does IR35 apply to?
IR35 may apply to you if you provide personal services through an intermediary. One way of working through an intermediary is by using your own Limited Company.
However, if you work through another type of intermediary, for example, an umbrella company then IR35 doesn’t apply, as you are already taxed as an ’employee’ of the umbrella company.
What does ‘outside IR35’ mean?
If a contract is outside IR35 it means HMRC sees you as ‘genuinely’ self-employed and you’re able to pay yourself in a tax-efficient way.
In order to be outside IR35, your contract must reflect you and your client’s actual working practices, so you aren’t caught out by HMRC.
What does ‘inside IR35’ mean?
To put it simply, working inside IR35 means that the services which you provide are considered by HMRC as a service of employment instead of Self-employment. Its less tax efficient to work inside IR35.
Working inside IR35 means:
- You’ll pay more tax.
- If you’re responsible for assessing your IR35 status and HMRC finds your assessment was wrong, you’ll get fined
Who makes the IR35 assessment?
As of April 2021, It is the client’s responsibility to assess your IR35 status, unless they meet at least two of the following criteria:
- They have less than 50 employees
- Their turnover is less than £10 million
- Their balance sheet total is less than 5.1 million
If you are responsible for assessing your IR35 status and you get it wrong, you will be fined.
Umbrella companies and IR35
So where do umbrella companies come in? If you choose to work through an Umbrella company you will be considered an employee of the umbrella company. This means the tax rules on agency workers and off-payroll working (IR35) will not apply to you. So there is no need to worry about IR35.
As you’re employed by the Umbrella, ‘disguised employment’ ceases to be a concern. We hope this helps! 🙂
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