IR35 was a legislation introduced to ensure that self-employed people or contractors were paying their tax, and not avoiding income tax through a move referred to as ‘disguised employment’.
It was brought into effect in order to combat the consequences of a previous legislation. HMRC made it so that companies hiring contract workers, who at the time were often simply self-employed individuals, liable for missed PAYE income tax. Basically, if a company did not deduct the correct income tax from a self-employed contractor, they would then be charged to make up the loss.
This put companies that used contractors at risk, and many stopped using contractors altogether, putting that market at risk. Contractors instead set themselves up as Ltd. companies, which were then paid, and they then paid themselves out of the Ltd. company revenue.
This ‘disguised employment’ meant that income taxes for particular jobs was much harder to track, and so the government brought in IR35 to combat that.
IR35 makes contractors be deemed as employees for tax reasons when operating through a company. However, they are only considered as employees for tax reasons, and don’t receive any other benefits that an employee would, except for a 5 per cent allowance that is meant to cover the cost of running a Ltd. company.
Issues with IR35
IR35 is hard to implement and harder to follow up.
It is a very costly and convoluted legislature that keeps courts busy across the country, despite several attempts to look into refining the law by the government and HMRC.
However, if you are a contractor, you must know where you stand with the law, to ensure that you are complying and don’t get levied with fines and repercussions. It is advisable to seek professional help if IR35 may apply to you and you are unsure of how it may affect you, or how to comply.