Essentially, IR35 is a legislation designed to stop workers fraudulently claiming to be contractors for tax benefits when they are for all intents and purposes an employee.
Do you provide your services through a limited company? If the answer is yes, HMRC needs to be convinced you’re not using your limited company to disguise a relationship with your client, which would otherwise be that of employer and employee.
Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC). If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 can be significant.
If you are a genuine contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to worry about from IR35. But still make sure that you take the time to understand how IR35 legislation works and apply best practice to ensure it does not apply to you.
If you have the same benefits, responsibilities and control as a permanent employee, then you would more than likely be classed as inside IR35 (caught by IR35). However, it is best to remember that although HMRC will more than likely want to see your contract, your working practices must reflect what is in your contract.
Essentially, an HMRC inspector will disregard the written contract in force between the worker and their client, and use the actual nature of the working relationship to create a ‘notional contract’.
What to do if IR35 applies – how to calculate the deemed payment
If IR35 does apply, then the legislation makes provision for paying that extra income tax and NICs. Furthermore, another frightening aspect of IR35 is that HMRC can go back at least six years and evaluate past contracts to see if the legislation applies.
That means HMRC can demand income tax and NICs, plus penalties and interest, going back several years, resulting in tax demands reaching six figures.
All this said, whilst there are much better tax benefits to working outside IR35, if you are found to be working inside IR35, there’s no need to panic. You can still run your own Personal Service Company (PSC) or limited company and you can still continue with the assignment you will just need to ensure you are paying the correct tax.