IR35 legislation was introduced in April 2000 to prevent contractors from taking on jobs as disguised employees. By working as a contractor through a limited company, there are tax benefits that boost your income.
If HMRC deems that you are within the IR35 legislation, which means you are considered to be an employee, you will be liable and will have to pay.
Are you inside or outside the legislation?
If you are considered to be an employee rather than self employed, you will fall within IR35, while if you can demonstrate that you are not an employee, you will fall outside the legislation. There are a range of factors that are used to determine your employment status, and these include equipment provision, substitution rights, financial risk and control.
You will have a contract that will outline the conditions of your employment status, although HMRC will expect to see that your working conditions reflect the terms in the contract.
What is the financial impact?
If a contractor falls outside the legislation, they are normally working through a limited company. Typically, a contractor will take a minimal salary – often the same amount as the personal allowances, so no tax is due to be paid – and the remainder as dividends. The contractor won’t have to pay as much National Insurance and won’t pay the higher rate of tax, as income is below the higher rate threshold.
Net profits of the company will be liable to corporation tax at the rate of 22 per cent.
If a contractor falls within IR35, they pay income and National Insurance on all their income. This means that they will probably exceed the higher rate threshold and will have to pay tax at the rate of 40 per cent on some of their income.
Business Entity Tests
Previously, contractors have taken the Business Entity Tests provided by HMRC to establish whether they were within or outside IR35. However, from April 2015, the tests are no longer in use. If an enquiry is launched by HMRC after 6th April 2015, the tests won’t be used. Enquiries launched up to this date will be settled using BETs.
Professional advice should always be sought, as the legislation is complex, and accounting services will advise regarding IR35 legislation.
If you would like more information about IR35 or to discuss how you are affected by it, call us today.