Understanding IR35

IR35, or off-payroll working is a set of UK tax legislations to determine the application of PAYE or self-employment financial benefits in relation to a contractor’s wage. The legislation has been put in place to tackle tax-avoidance. The rules help to determine whether a worker is a contractor or in fact self-employed and ensures the correct Income Tax and National Insurance is paid. 
This article explores why the legislation was implemented, what relevance it has to contractors and why you should be IR35 compliant.

Why was IR35 implemented?

Government imposed the Intermediaries Legislation, or IR35 in April 2000 to close a ‘loophole’ within the UK tax system whereby workers could set up a limited company in order to pay less tax. HMRC are targeting contractors who are  ‘deemed as employees’ but are engaged on a self-employed basis, meaning that their wages should be treated as PAYE. 
However, some contractors who are genuinely using a limited company structure have also been targeted by HMRC. Don’t despair! Optimum Pay Group is on hand to ensure you are fully IR35 compliant and will guide you through the process. 
In April 2017 and then 2021, the IR35 public sector reforms were implemented, and it means that it is no longer the sole responsibility of the contractor to check compliancy. dependent on who the individual is contracting for. However, as specified within the reforms, responsibility lies with the contractor if employed in the private sector, or if the contractor is classed as a small company through the Companies Act of 2006.

What is inside and outside IR35?

The two terms indicate your IR35 status. Outside IR35 means that you are considered self- employed in the eyes of the law. You will need to deduct your own tax either by yourself or through your limited company correctly, and on time.

This is usually completed through dividends taken from your limited company and your salary. In some cases, individuals are subject to an enquiry by HMRC to check compliance with the legislation.

When it comes to being inside IR35 you are considered an employee by HMRC for tax purposes which means you are subject to PAYE.

Individuals classed as inside IR35 must ensure they are paying tax appropriately either through an accountant, fee-payer or umbrella company. We recommend reassessment of this if you change your type of work or if you begin a new contract with an employer.

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