What is IR35 legislation?
If you are contracting in the UK, you must know what IR35 legislation is and how it will affect your career. The UK Contracting Support Website team has done its best to summarise IR35 in an easy-to-understand way below. Hopefully after reading this, you’ll be able to answer – ‘what is IR35?’
Background to IR35
IR35, or ‘off-payroll working’ as it’s commonly referred to nowadays, is legislation that the government introduced in 2000 (Finances Act). Before we carry on – you may already have heard a lot about IR35 (formally the Intermediaries Legislation), and it may all have sounded mightily complicated. If this is the case – don’t worry. It’s easier to understand the basics than you might think.
There had been an increase in workers choosing to operate through a limited company as a way of reducing their tax liability. This is because limited company directors could decide to pay themselves with a combination of dividends and salary – resulting in higher take-home pay retention than an employee in a full-time role (receiving PAYE).
We love how FreeAgent have defined IR35, because it hits the nail on the head:
“IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name.”
In HMRC’s eyes, many limited company directors were just disguised employees who had chosen to launch a limited company for the sole purpose of reducing their tax and National Insurance liabilities. Also, IR35 is the government’s way of ensuring all workers are paying their fair share of tax and National Insurance and that nobody is taking advantage of loopholes they’re not entitled to.
A typical example is a full-time worker in a Monday to Friday scenario. That same worker turns up to work on Monday but says to their boss – “hello – I’m now working through a limited company – please pay me gross, and I’ll make the necessary deductions”. The worker will see a significant increase in their take-home pay – even though the only thing that has changed is their set up – not the work they’re undertaking.
To put it simply, if you’re outside IR35 in the eyes of HMRC, you are a genuine contractor who does not work in the same way as a permanent employee. Therefore, you’re entitled to pay yourself with a combination of dividends and salary.
If HMRC opens an investigation into your tax affairs because they suspect you have been paid incorrectly or you have not been honest with IR35 assessments, you may be required to pay back the tax you’re deemed to owe. Potentially, this could be a huge bill. Therefore, it’s always been critical that limited company directors make fair and accurate IR35 assessments.
if you’re inside IR35, you are in fact working in the same way as permanent employees. Therefore, you shouldn’t be able to take advantages of tax breaks that they don’t have access to. You’ll be required to be paid in accordance with Pay As You Earn (PAYE) – HMRC’s tax system for employer’s to ensure employee’s pay their fair share.
Contractors who find themselves inside IR35 are not better off by contracting through a limited company. There has been a noticeable rise in the number of umbrella companies in the UK – businesses that process PAYE payroll for contractors and freelancers. If you’re inside IR35, you should consider using an umbrella company for your payroll. You may well decide it’s more favourable than contracting through a limited company. And, some end-hirers or agencies may not allow you to work inside IR35 and through a limited company.