What Is IR35 and Why should you be aware of it?

In present times, IR35 is a rather hot and much-discussed topic amongst contractors. Everywhere you see, IR35 is being discussed at some point or the other. But what is it? Why is it essential in the life of a contractor and how does it impact the career of one? If you decide to start a limited company, what are the fundamental things you must bear in mind? Let us try to answer these very pertinent questions one by one!

What Is IR35?

IR35 was introduced in the year 1999 to tackle the problem of tax avoidance from all those workers who delivered their services to diverse clients through an “intermediary.” This intermediary could be anyone from a limited company to an umbrella company. The IR35 also ensures that the worker would still be an employee of the client even if the services of the agency are not availed. Earlier, the terminology “disguised employment” was also put into use to demonstrate such engagements. The fundamental purpose of IR35 was to save the NIC and the engaging client tax. In addition to that, it served to limit the employment benefits and rights like notice periods and holiday entitlement.

Therefore, IR35 is essentially another name for “intermediaries’ legislation.” This applies to your National Insurance Contributions and tax if you work through an intermediary for a client. The main advantage of IR35 is that it plays a crucial role in tax saving.   

How Can You Test the IR35 Status? How to handle an IR35 investigation?

Whenever you negotiate a position as a contractor or a freelancer with a company, you must give special consideration to both the actual working practices and the contract. If HMRC ever questions your IR35 status and decide that it falls “within IR35,” they will try to prove that your engagement is as a “disguised employee.” In addition to that, there are some basic ‘tests’ of employment that determine the status of your employment as mentioned below:

1.   Control

This refers to the kind of control you have over essential aspects of your employment such as when, where and how you deliver the services to clients.

2.   Substitution

If for some reason, you cannot deliver some services by yourself, substitution refers to sending somebody else in your stead to deliver the services to the agency or the client.

3.   Mutuality of Obligation

This is another concept wherein your employer will be obligated to give you work, and you will be obligated to accept and work on it. Mutuality of Obligation can work after or during the contract. Some other factors might also back the principal tests of employment mentioned above such as:

• A responsibility to deliver equipment as well as training as a part of the services provided by you
• A responsibility to maintain sufficiently adequate business insurance efficiently throughout the length of your contract
• A responsibility to repair the defects at work by yourself and in your own time as well as at your own cost

How to Ensure That You Fall Outside the IR35 Status?

It is recommended for all kinds of businesses that operate in the contractor market to get an IR35 review prior to signing a contract with a particular agency or client. This goes a long way to ensuring that your IR35 status is never disputed and that you can enjoy a safe and regular employment position with a specific agency or company.

So, What Is the Purpose of IR35?

An intermediary can be defined as a partnership, limited company or an individual that you use as a mid-way to work for the end-user or the client. Therefore, the IR35 compliance is super crucial for intermediaries and as well as you as the contractor. That said, there are several rules in place that ensure that NI contributions and tax are not paid twice on the same income.

Although it is a bit tricky to understand these technical terms, it is super important to keep them in mind because in case HMRC finds that you are IR35 liable, it will become mandatory for you not just to pay any NI contributions or tax but also the overdue interest amount that you owe on the total amount. This makes it all the more important to get an IR35 compliance check or review done to see where you stand.         

Why Choose DNS Accountants?

DNS Accountants is UK’s most reputed Accountancy Company that can assist you if you are overly worried about your IR35 status. It is common to see most contractors struggle with all the ins and outs of IR35 which is where we come into the picture. Trust us; you are not alone! We have experts in our team who understand the legislation of IR35 like the back of their hand. Therefore, you are guaranteed the perfect services at all times.