Ir35 - The Rules And Regulations Explained
If you work as a freelance contractor, particularly within the IT industry
, then you will probably already be familiar with the IR35 rules and regulations. The IR35 affects all contractors who dont come under the Inland Revenue's classification of 'self employment'.
IR35 became law through Schedule 12 of the Finance Act 2000, and was put into place to prevent freelance contractors from taking their income by way of a small salary and large dividends from their limited companies. This way, the Inland Revenue could be sure that contractors had the same taxation laws applied to them as those carrying out the same job under regular PAYE conditions.
The main reasons behind putting the IR35 rules into place as there were many in the IT industry who leaving their permanent job and then returning soon after to do the same job, but as a contractor working via a limited company. This enabled them to get paid a lot more for the same job as they were doing previously, but as a freelancer they would be paying less tax and national insurance as a proportion of their income.
The Inland Revenue makes the decision whether employment is considered to be subject to the IR35 rules or not, by calculating if that person is employed or self employed.
For those working in an office or at a location on a typical 9-5 basis, as an employee with no direct responsibility and using the equipment supplied at the business premises, then the Inland Revenue would consider you to be employed, thus you would be subject to the IR35 rules.
On the other hand, if you are based from home, have a number of different clients and use your own equipment for work, then you are said to be self employed under the rules. The Inland Revenue looks at all the circumstances regarding your working situation and determines your employment status from their findings. The more indicators there are to legitimate self employment the better for you as it means you avoid IR35.
A regular limited company contractor who the IR35 rules dont apply to, would normally take out a reticent salary (net of employers and employees' national insurance contributions, and income tax), with the main part of income being in dividends. If you come under the umbrella of IR35 regulations, then your income from that contract will be significantly reduced in comparison to being termed as self-employed.
Before accepting a new IT contract, as a contractor you should make certain that the conditions of the contract demonstrate that they are agreeable with the IR35 rules, meaning you are not seen to be an employee of your client. This also applies to the way you actually carry out your duties, such as the location and equipment used for the task.
The IR35 rules are not applied to the person; they are applied to each individual contract. This means that you may well have 3 or 4 different contracts a year, but it doesnt necessarily follow that each one will fall within the IR35 rules, they are all viewed separately.
There are still plenty of contractors working who have done nothing about the IR35 issue, expecting the legislation to be withdrawn, or assuming it doesnt apply to them. However, IR35 is the law and your responsibility as a contractor is to check if you fall within their rules and, if so, make arrangements to pay the correct taxes.
To avoid the IR35 regulations, your contract and a working practices have to plainly demonstrate that you are 'self employed' according to the HMRC's employment status rules. If you are unsure if the rules apply to you, then check online for specialist contractor accountants with expertise in IR35 and IR35 Rules. Online IR35 accountants can offer clear and straight forward advice and provide a free tax calculator to help you calculate your take home pay.
Look online for specialist contractor accountants offering accountancy for contractors and accountancy for freelancers in the UK and see how they can ensure you follow all areas of IR35 compliance as well as maximize your take home pay.
by: Michiel Van Kets
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