IR35 is legislated into law to counteract tax avoidance by workers who offer their services to clients through an intermediary. This intermediary might be a limited company. Workers would be labeled as an employee if intermediaries are not used.
Her Majesty’s Revenue and Customs (HRMC) call these workers ‘disguised employees.’ Workers who do not adhere to this law will have to pay income tax and National Insurance Contributions (NICs) as if they were employed. IR35 can significantly reduce the net income of these workers by up to 25%.
IR35 has received negative criticisms from tax experts and the business community. Its poor conception, a bad implementation by HRMC, and influence on hardships resulting in unnecessary costs contribute to its negative image, despite being implemented since 1999.
Individuals who are really on their own business accounts do not need to fear IR35. They just need necessary preparation if investigated by HRMC.
Basics of IR35
IR35 is a tax law introduced in 1999. It is also known as the Intermediaries Legislation and part of the Finance Act enacted in April 2000. IR35 is coined by then Inland Revenue (now HRMC) which announced its creation.
Premise of IR35
IR35 was created to handle cases of ‘disguised employment.’ This occurrence happens when organizations employ workers as self-employed. Intermediaries are often used in this event. They also do it on an employment contract, thus these workers become disguised employees.
The organization that engages these workers can save large amounts of funding as they are not required to pay for employers’ NICS. Moreover, they are exempted from offering employment rights or benefits.
A classic example is the ‘Friday to Monday’ phenomenon. This happens when an employee leaves employment with their employer on a Friday, yet only to return to the same office with the same role on a Monday. This employee changes his job title as a consultant or as a contractor through a personal services company with less tax.
Amendments must be done to the current tax law in order to defend the rights of workers from employers who take advantage and lost tax yield from the Exchequer.
The mechanism of IR35
IR35 is designed to check if a legitimate one person small business is turned into an employee. Thus, guidelines are set to check the legality of a person’s employment.
The written contract between the client and their work is disregarded by the HRMC inspector. The HRMC inspector checks the actual nature of the working relationship to create a ‘notional contract.’
A tribunal judge or an inspector will use this hypothetical contract to check whether the contract is for employment or it is for a business to business services.
IR35 is not a thing to be worried about by people who really engage in small businesses and not hiding as ‘disguised employees.’
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