IR35 is a concept that is essential within the contracting community and greatly affects the profession. At its bare bones, the term, ‘IR35’ is the common name used for the Intermediaries Legislation, which like many HMRC legislations, is designed to combat tax avoidance.
What makes IR35 somewhat different to other tax issues however, and what makes it specific to contractors, is that the legislation is aimed at identifying individuals who are working through their own limited companies who may be avoiding paying the tax that they should be.
IR35 Rules Challenge Contractors
The legislation focuses on those who give their professional services to clients through the use of their own limited companies, and assesses their position as a contractor, discerning whether or not they are indeed genuine independent businesses. IR35 rules
challenge contractors who are being treated financially as self-employed professionals, taking dividends from their company and therefore paying far less tax than they would if they were a PAYE employee of their client.
*Key Point* A limited company is an entity created by a contractor in which they can then offer their services through. HMRC tend to refer to them as Personal Service Companies (PSCs).
IR35 has an impact on all contractors who fail to meet the definition of ‘self-employment’ made by HM Revenue & Customs, who are increasingly tightening their grip on all those contractors who potentially fall inside IR35. Any contractor that does not fit this label is classed as a ‘disguised employee’, and it is this notion that the entire concept of IR35
is based upon. The general point of this is to stop those who appear as contractors but are in fact working like an employee, but still have the right to all the tax breaks that those working under limited companies receive. This is the core idea behind the term, a ‘disguised employee’.
This basically means that if HMRC do not recognise a contractor as genuinely ‘self-employed’ from a tax perspective, they should therefore be taxed the same way that a general employee should be, thus falling under what is called IR35.
Falling under the legislation could have a huge impact on a contractor, because if their position at a company is seen as being an employee by HMRC, then all of their tax advantages gained by being a contractor are lost and they are made to pay back the funds that they will have benefited from during the contract, plus interest and penalties. IR35 INSURANCE