What is IR35?
IR35, or the “Intermediaries Legislation”, was created to fight ‘disguised employment’ – that is, contractors operating through a Limited Company, with all the associated tax advantages, but behaving as an employee. It requires 95% of all income through a contract caught by IR35, to be taxed as a deemed salary. For more information, see our handy IR35 guide here.
What has changed?
The changes only apply when engaging contractors operating through a Limited Company, for work in the Public Sector.
If the engager deems a contract to be within IR35, they are responsible for tax and National Insurance deductions from the contractor’s invoices, before the money reaches the contractor. In short, payments are treated as salary – Corporation Tax is not due on any income paid in this manner, but only very limited tax advantages can be claimed.
In practice, because the rules around IR35 are so complex and the penalties for non-compliance so severe, public sector engagers are deeming contracts within IR35 in all but the most cut-and-dry cases. Most engagers are also insisting on the contractor earning via an Umbrella Company and not a Limited Company.
HMRC has developed an online IR35 tool (found at https://www.gov.uk/guidance/check-employment-status-for-tax) to support classification of a contract. HMRC state that it will “stand by its results, where correct information has been inputted in line with the guidance.” It is worth noting that the tool has not yet been tested in a court of law and contractors and engagers alike should be wary of relying solely on this assessment.