Do you need the IR35 rules explained in a simple manner?
We’ve got you.
Let’s start from the beginning:
The regulations were first introduced in 2017 and 2021. They served as updates to the laws governing off-payroll work that the UK government had planned to abolish.
The goal?
To ensure that the contractors companies employ, if sourced through third parties, are suitable for that status and should not be paid directly from payroll. It’s because there were some concerns that taxes were not being paid properly.
But that’s just the tip of the iceberg. Let’s dive a little deeper:
What Is IR35?
The term IR35 itself refers to the Inland Revenue’s press release from 1999, which introduced new tax rules. It is also known as the Intermediaries Legislation.
In short, it is an anti-avoidance tax regulation in the United Kingdom. It aims to identify individuals who work as contractors or freelancers but are treated as employees. It’s done for tax and the related National Insurance Contributions (NICs) purposes.
So:
If a contractor has the same responsibilities as an employee – working 8 hours a day in a company’s office, for example – they are deemed inside IR35. As such, their income is subject to PAYE (Pay as You Earn) tax and NICs.
The IR35 rules are for small companies, medium-sized businesses, and enterprises alike.
How Does IR35 Impact Contractors?
Contractors are individuals who provide services without being hired as full-time employees. Usually, it happens through their own limited companies.
The IR35 makes it crucial to determine the actual employment status of all contractors for tax purposes. Once it’s done, they can be put in one of the two categories:
- Inside IR35 – the engagement counts as an employment relationship; the parties are subject to PAYE tax and NICs. In this case, the responsibility for taxes and NICs shifts from the contractor to the client or hirer.
- Outside IR35 – the contractor is operating as a business and can pay themselves a salary and draw the rest of income as dividends. They remain responsible for their own taxes as usual.
As a result, contractors in the UK inside IR35 may experience a reduction in their take-home pay due to higher tax and NICs contributions. They may also lose certain tax advantages associated with self-employment, such as claiming certain expenses. In addition, they may not be entitled to employee benefits such as sick pay, holiday pay, and pension contributions. There is often no space for discussing a promotion or their salary which demotivates valuable talents.
But how does it avoid the companies?
How Does IR35 Impact UK Companies?
To determine whether IR35 applies, HM Revenue and Customs (HMRC) assess various factors. They include, but are not limited to:
- The control the contractor has over their work
- Their ability to provide a substitute
- The presence of financial risk
Since April 2021, medium and large private-sector organizations are the ones responsible for determining the IR35 status of their contractors. In order to assess accurately and maintain compliance with the regulations, companies need to:
- Review existing contracts
- Engage with contractors to gather necessary information
- Compare the data with the regulations
If a contractor is considered inside IR35, this may result in increased costs for the client company.
The solution?
Outsourcing.
Leveraging Outsourcing to Navigate IR35
Outsourcing is the practice of hiring external firms or individuals to perform tasks that would otherwise be handled internally. It’s done to save costs and access specialized skills.
There are two types:
- Offshoring – working with people or companies in far-off regions and countries, usually on other continents.
- Nearshoring – choosing firms in places closer to your location or at least in your time zone.
To mitigate the risks of outsourcing, your best bet is to work with specialised companies.
How can they help?
Outsourcing firms are the ones hiring the employees instead of you. This distinction helps your company maintain contractual relationships without falling within the scope of IR35. As a result, you’re safe from potential tax and legal liabilities.
We at Expert Allies have a long track record of working with UK clients. So, we’re pretty used to navigating the IR35 regulations for both contractors and companies.
Contact us today – we’ll provide a consultation for free!
To Sum Up
Okay, we’ve explained the rules of IR35 and how they can potentially impact you. There’s one thing to remember:
It is not as hard to tackle as it sounds.
All you need is an expert ally by your side. By partnering with suitable outsourcing companies, you can benefit from cost savings, specialized expertise, flexibility, and more. And, of course, you can not only ensure compliance with IR35 but also unlock the full potential of your projects.
What’s there to lose?
FAQ
What is the IR35 protocol?
The IR35 protocol is a UK tax legislation against tax avoidance. It is aimed at contractors supplying their services to clients via an intermediary but working in the same conditions as full-time employees. The regulation ensures they pay similar taxes to actual company hires.
Does IR35 only apply to UK companies?
IR35 applies to any company, regardless of its location, that hires contractors working in the UK or for UK-based clients. Basically, it is focused on the employment status of a worker within the United Kingdom’s tax jurisdiction.
What is the contractor tax in the UK?
Contractors in the UK usually pay taxes through their limited companies. Those include Corporation Tax on profits, Income Tax on salary and dividends, and National Insurance Contributions. Those inside IR35 are taxed similarly to full-time employees.