IR35 In-Depth

19 Feb

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After the last post on IR35 from Clearskyaccounting.co.uk we thought it only appropriate to take you a little further in to why IR35 was brought about. We hope by providing you with this information it will better help you understand the legislation and how to avoid any penalties from incorrect categorisation.

The ‘Intermediaries Legislation’ was brought in to place on 6th April 2000, it was first suggested in 1999 by the then Chancellor of the Exchequer, Gordon Brown to combat ‘tax avoidance’ via the use of personable services companies.

At the time, companies within the U.K. were managing to avoid paying PAYE tax by working for a client but receiving payments via an intermediate company. So, any self-employed person could use a limited company to provide his/her services via, pay themselves a reasonable salary from this company, and then take the profits from the company as dividends.

They were managing to avoid PAYE tax as dividends are not subject to this and as a ‘self-employed’ individual they were able to avoid Class 1 NIC’s, a tax break introduced for self-employed individuals for the risk of self-employment.

IR35 went on to argue that ‘contractors’ are actually employees of the end customer and not actually ‘self-employed’, therefore they should be taxed accordingly, the same way as regular employees. Some would argue that IR35 was introduced only to increase tax revenues to the Treasury.

According to the Inland Revenue:

“The purpose of the new rules (IR35) is to remove opportunities for the avoidance of tax and class 1 National Insurance Contributions by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.”

More recently, on 20th May 2010, the Liberal Democrat/Conservative coalition Government announced to “review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility.” The IR35 is still in place however, there is a view to change the rules in the future.

The review of IR35 is due to extensive criticism from various parties who believe the tax law is unfair and does not adequately represent the parties it is taxing.

It is difficult to assess the impact of IR35 as there have been no official figures published to date. To be sure you are within the correct boundaries of IR35 contact ClearSky Contractor Accountants.

Author Bio: Leah Jarratt is a regular guest writer for ClearSky Accounting, your accountancy expert.

5 Responses to “IR35 In-Depth”

  1. Alayna May 22, 2013 at 10:56 am #

    Please if anyone could answer this question , examples would also be a bonus thank you !
    It automatically put me into this section i did not realize it was the legal section although there is legal aspects to this question such as government funding and it is not homework i just need to improve my knowledge as a volunteer myself , thank you for the answers

  2. Tori May 22, 2013 at 3:13 pm #

    Reason for my question I’m looking to leave paid employment which provides pension, holidays etc, and move into contract work. My current salary is £33k

  3. Connie August 23, 2013 at 8:15 am #

    Thanks very much for the info. I forgot to mention that I’m in the UK though!

  4. Floyd August 26, 2013 at 12:35 pm #

    I’m a subcontracting Electrician and would like to know the pros and cons of setting up a limited company. I normally work through a Composite company system and wondered if there were any advantages in a Limited company.

  5. Kerry September 7, 2013 at 7:50 am #

    My other half has registered as self employed however he is working for one business only and invoicecing the boss of the fencing business on a monthly basis. So basically a sub-contractor. What sort of documents other than a copy of the invoice should he keep and also how would this be set out? Would a cash book be neccessary with this type of employment? Any advice would be much appreciated!

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