Introducing
IR35
The Inland Revenue introduced IR35 on 6th April
2000. The legislation was intended to bring into
line the tax and National Insurance paid by contractors
operating through personal service companies with
the levels paid by permanent employees.
Prior to the introduction of IR35, a contractor
could take a relatively low salary with the balance
of income as dividends. The dividend payments
were not subject to National Insurance charges.
The IR35 rules apply where a worker supplies
services to a client through an intermediary such
as a personal service company. The question is
to establish whether the worker would have been
an employee of the client, that is, as if employed
directly by the client. If the answer is ‘yes’
then the effect of the legalisation is to tax
the worker as an employee of the client, less
certain expense allowances.
Since the introduction of IR35, the Inland Revenue
will examine contracts and assess whether the
contractor is genuinely 'in business on his/her
own account' i.e. more like ‘self employed’ or
whether the nature of the assignment is more ‘akin
to employed’.
However, what constitutes ‘employment’ or ‘self
employment’ is a complex issue and there are no
hard and fast rules or legislation. The decision
will be based on the facts of each case and will
be subject to interpretation based on cases that
have been through the courts.
Whilst the terms of the contract are important
in establishing status, the wider picture of work
practices and how a contractor’s business is set
up and run will be taken into account.
As a rough guide, if your income is caught by
IR35, it could result in a reduction to your net
pay by around 15-20%.
At Trafalgar, we regard each contractor as an
individual, consequently we discuss IR35 compliance
and the implications and risks associated with
each individual’s actions and circumstances.
Key factors in deciding employment status:
- Control
- Right to substitute worker
- Provision of equipment
- Financial risk
- Basis of payment
- Opportunity to profit from sound management
- Whether part and parcel of the organisation
- Right of dismissal
- Employee benefits
- Length of engagement
- Personal factors
- Intention of the parties
To discuss the issues of setting up and
running a limited company and the implications
of IR35, contact:
Trafalgar
Accounting Solutions Ltd
020 7940 3090
Useful Links:
http://www.inlandrevenue.gov.uk/ir35/
http://www.pcg.org.uk/
http://www.shout99.com/contractors/
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