IR35 legislation can render your earnings subject to PAYE even though you believe you are effectively ‘self employed’, and can therefore cost you dearly if you don’t know the rules.
The legislation bites where the contractor would have been an ‘employee’ of the ‘end client’ other than for the interposition of an intermediary (eg, through a limited company) .
If the ‘end client’ meets the Companies Act definition of a ‘medium’ sized or ‘large’ entity, it is the end user is responsible for deciding the correct tax treatment for the contract. However, if the end user meets the Companies Act definition of a ‘small’ entity, it is the contractor’s own responsibility to decide whether or not IR35 applies, and the end user is ‘small’ if it meets 2 or more of the following criteria:
Unfortunately, deciding whether a worker would have been an employee of the end user were it not for the existence of the intermediary company can be difficult, as illustrated below:
An electrician provides his services via a limited company.
If he uses his own van, tools and equipment, works for lots of different clients, gets paid a fixed sum for the job, and plans and controls his own work, he is very unlikely to be an employee caught by IR35.
By contrast, if he works for just one builder, uses the builder’s van, tools and equipment, gets paid by the hour, and the work he does is controlled by the builder he very probably will be caught by IR35
So far, so simple, but what happens if he contracts to (say) 4 different builders, uses his own tools and equipment, but gets paid by the hour by each builder, and one or more of the builders is pretty hands on in planning and supervising his work?
Whether a contractor is ‘inside’ or ‘outside’ IR35 is important because:
A contractor who is ‘outside IR35’ remains in charge of how profits are distributed – for example, by deciding if and when a salary or divided is paid (and therefore taxed), AND choosing to whom the salary or dividend is paid.
BUT
A contractor’s work which is ‘inside IR35’ is taxed under rules similar to the way PAYE is applied to an employee (whilst the ‘deemed employee’ receives none of the protection or benefits given to real employees, such as pension entitlement, security of contract, paid holidays etc)
AND
Those contractors who are outside of IR35 will usually pay significantly less tax than those inside IR35.
If you are a contractor don’t pay more tax than you need to.
Contact David Sutton on 07881 286903 for advice on what action you need to take to minimise the impact IR35.