Background to IR35 Legislation.
UK government first introduced the IR35 legislation in April 2000.
This law is an anti-tax avoidance to ensure that employees pay the right amount of tax.
It requires workers that work with a specific arrangement to be treated as employees rather than self-employed.
The arrangement is affected by IR35 Legislation.
When an individual let’s say, Jack sets up a limited company (Jack ltd).
Jack ltd would be an intermediary through which Jack would provide services to AB Bank Ltd.
By doing this, AB Bank ltd would then have to pay Jack Ltd.
The total cost of the services would be paid without deducting tax and national insurance.
Jack by setting up the company has done so with the assumption of running a business. The company could claim all the expenses in running the business which invariably reduces the corporation tax paid.
However, if the individual doesn’t meet several tests that have been set, then he might be a disguised employee.
A disguised employee under IR35 legislation.
It is defined by HMRC as someone who is a contractor. He works under the arrangement described above filling a permanent position in a company.
Test to take for IR35 Legislation.
IR35 has been very complicated legislation and therefore have its has changed several times.
HMRC has set tests using the past tribunals and court rulings. Also, using the proof of employment to check if an individual is employed or self-employed.
Test of employment such as the contract in place, and mutual obligation between the individual and the employer.Others such as how much control is exerted by the employer. Checking whether the employee can be substituted or not, etc.
However, to know if an individual is caught by the legislation, You can take the test on https://www.tax.service.gov.uk/check-employment-status-for-tax/cluster/
Impact of IR35 legislation.
If caught by this legislation, the payment made to the individual would be treated as deemed employment. An allowance of 5% of turnover would be allowed for other expenditures. Employment expenses already passed through the PAYE would be recognized (such as salary). Also, legitimate employment expenses related to the individual such as pensions, travel, and subscription.
Application of IR35 legislation post 6th of April 2017.
Before the 6th of April 2017, the employee had the responsibility of checking if the IR35 legislation caught them.
In the tax year 2017, this changed for the individuals that worked in the public sector as their employers were responsible for checking if their status.
How do most public sector employers apply the IR35 legislation?
Some of the public sectors took the general approach rather than applying the legislation on an individual basis. And most contractors were brought under IR35 legislation immediately after the 6th of April 2017
Plans for IR35 legislation to the Private sector in 2018.
Most of us knew it was a matter of time before the HMRC changed to the private sector.
Having had a grasp of the IR35 legislation in the public sector, it is vital that contractors who are affected by these changes ensure to receive adequate and appropriate advice.
In the private sector, most of us knew it would only be a matter of time before the HMRC got involved. In the autumn budget of 2017, the Chancellor announced that consultations were ongoing and the discussions were to help to implement the changes for IR35 legislation in the private sector.
The IR35 would finally be moved to the private sector from April 2010 and medium and large businesses would be responsible for setting the tax status of their contract works under proposed the IR35 tax reform. Where the rules do apply, the organization, agency or other third parties paying the worker’s company will need to deduct income tax and employee National Insurance Contributions (NICs) and also pay employer NICs.
Advice on how to deal with IR35 legislation.
Suppose you are not sure if this legislation affects you. We would advise taking the test stated above.
But if you would like more timely and professional advice, kindly contact us.