Tax avoidance is a serious matter, IR35 is designed to stop contractors and clients from avoiding paying tax and national insurance.
As of April 2020, IR35 rules change for contractors who are working within the private sector for medium to large clients. As with the public sector, the client will have to look at the parameters and determine if the contractor falls inside or outside of IR35.
IR35 is a piece of legislation that enables HMRC to take additional payments from contractors who they feel should be paying income tax and national insurance based on the fact they are employees in all but name when working with certain clients.
It is relevant to both the public and private sectors where contract work is carried out, however, there are differences in how the payment is taken.
Public Sector – the contractor’s client is responsible for determining if IR35 applies to the contractor. If it does apply they will need to put the contractor onto their payroll and deduct income tax and National Insurance.
Private Sector – if it is believed that IR35 applies to the contractor then the client will have to make an extra payment to HMRC for the additional tax and National Insurance they would receive based on an equivalent employee’s wages.
HMRC take several factors into account when determining if a contractor should be within IR35, these include the following:
- Control – how much control does the client have over where and when the contractor carries out work
- Personal or substitute? – does the contractor carry the requested work out personally or do they send a substitute when needed
- Work requests – does the contractor expect the client to provide them with work and does the contract have to carry out any work requested by the client?
If you are a genuine freelancer, contractor or consultant who is running your business from your account then IR35 will not affect you. Following best practices and keeping your books updated means you will have all the relevant information available should HMRC investigate you.
It is recommended that you seek expert advice as to whether you fall within the parameters of a contractor that should be ‘caught by IR35’ to ensure you have the correct information to hand. There are also several free online contractor calculators you can use for guidance.
If HMRC finds that you are inside IR35 there will be a demand made to retrospectively pay tax and national insurance that is owed and a possible penalty so it is very important to look into this and make sure you are following the requirements.