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IR35 put simply

This is a tedious subject, I know, but HMRC seem to have caused plenty of confusion with their complex guidance once again. So here are the simple facts about IR35.

Why?

The IR35 legislation’s main purpose is to act as a deterrent to those knowingly avoiding tax and NI contributions. HMRC announced that to abolish IR35 would lead directly to a £550m estimated loss in revenue. Ultimately, HMRC is increasing the financial burden on contractors with a confusing system – who knows why they do what they do?

Who does it effect?

All contractors who do not meet the Inland Revenue’s definition of ‘self-employment’. The rules essentially mean an increased tax and NI liability which will subsequently prevent contactor companies from retaining profits to grow their business in the future.

In more detail

Contractors who IR35 applies to will be liable to Schedule E taxation and NI FOLLOWING DEDUCTIONS FOR EXPSPENSES. This is important: Expenses can be taken as normal before the tax and NI deductions are calculated. Normal Section 198 expenses may still be claimed. There is also provision to other intermediary contractor’s turnover – these include:

  • Pension payments
  • Business travel
  • Subsistence (accommodation + meals away from home)
  • Professional Indemnity cover
  • Benefits in kind (private medical insurance)

Are you employed or self-employed?

This is the big question and because employment status is often unclear and complex; many contractors find it hard to decide whether IR35 even applies to them.

Use HMRC’s employment status indicator here: http://www.hmrc.gov.uk/calcs/esi.htm

Can IR35 be avoided?

If you can diversify your business interests and change your working practises then a contractor that is clearly self-employed would avoid IR35 legislation. If you can show that you are self-employed and satisfy HMRC’s guidelines then, so long as your contract matches your working practices, IR35 will not affect you.

It is not advised that this legislation is ignored as the financial burden to those who do not make arrangements to meet their tax and NI contributions could be crippling if caught at a later date. Yes IR35 could be revoked or amended but for now it is here to stay and no response would be a poor choice.