What is IR35 and what does it mean?

Self-Employed contractors working through a limited company can benefit from tax advantages, but IR35 rules change the way this can be done lawfully. IR35 seeks to make sure contractors working in the same way as permanent full-time or part-time employees pay the same tax and national insurance as an employee to crack down on tax avoidance.

What is IR35?

IR35 is defined as off-payroll working by HMRC. IR35 is shorthand for the UK tax legislation that is designed to identify contractors and businesses which are avoiding paying the appropriate tax by working as `disguised` employees, or are engaging workers on a self-employed basis to `disguise` their true employment status/ IR35 was introduced in April 2000 and takes its name from the original press release published by inland revenue (now HMRC) accounting its creation.

What does inside IR35 mean?

To be operating `inside IR35` means that, under the IR35 legislation, you must pay the same tax as an employee. This could also mean that you are entitled to an additional right as an employee or worker.

If you’re found to be working inside IR35, you will usually have to pay a `deemed payment` of income tax at the end of the tax year to account for any tax deductions or NIC that an employee would have paid.

What does outside IR35 mean?

To be operating `outside IR35` means that the IR35 legislation does not prevent you from paying tax on the private contractor basis described above. This means you can pay yourself a salary and withdraw further income as dividends, whilst your limited company pays tax only on its profits at the corporate 20 percent rate.

Will the IR35 changes be delayed?

The IR35 changes originally expected to be implemented on 6 April 2020. However, due to the coronavirus (COVID-19) pandemic in the UK and across the globe in early 2020, the government announced an IR35 delay. The new IR35 regulations were deferred a year. To April 6, 2021.

What do the changes mean?

  • Rules for engaging individual through personal service companies or other intermediaries changed
  • Responsibility for working out if the 0ff-payroll working rules (IR35) apply moved to the organization receiving an individual’s services

You need to understand

  • The impact of the changes on your organization
  • Actions you might need to take

Does IR35 apply to LTD companies?

IR35 will affect you as a contractor if you work for your own limited company. If you work through an umbrella company (a limited company that employs contractors and acts as a third party supplier between the contractor and the client) you don’t need to worry about IR35 as you’re already paid through the PAYE system and work under a contract of employment with the umbrella company.

IR35 doesn’t apply to sole traders either, but rules for determining employment status do. This means that if the contractor is registered as self-employed but is found to be working as an employee, the end client will be responsible for paying any additional tax due.