In April 2000, the UK government first introduced the IR35 legislation as an anti-tax avoidance measure to ensure that employees paid the right amount of tax.
The legislation sees to it that employees and their employers do not avoid the payment of tax and if they are caught doing so, they have to pay income tax and National Insurance Contributions.
This law requires that persons who work with a specific arrangement be treated as employees rather than self-employed individuals.
IR35 is not without significant impact. If caught by this legislation, the payment made to the individual would be treated as a deemed employment and 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).
This also holds for legitimate employment expenses related to the individual such as pensions, travel, and subscriptions.
On the other hand, being self-employed means that you run your business yourself or employ people to work with you. As a self-employed individual, the financial risk of the business is totally yours. You would have to register with HMRC as being self-employed and the business would not be run through a limited company.
Sometimes, since individual circumstances can be very different, if you are still unsure as to whether you are employed or not, there are further tests that can be carried out to help understand better. Do you have a mutual obligation with your employer? Are you well integrated into the team? Does your employer control the way your work is done? Do they provide equipment such as computers, printers, etc.? Can you be substituted at work? Do you have a financial risk for working in the establishment? Do you have different paymasters?
If your answer to all of these questions is yes, then you are an employee. This Employment Status Key Test reveals the difference between a self-employed person and an employed person.
If you like to read more about the IR35 legislation, kindly click.
You can also read here
In this blog, I will like to highlight some of the things that contractors need to do to prepare themselves for the new changes.
Prepare your final account before closing your limited company.
If you plan not to use your limited company under the new IR35 rules, I would advise that you prepare your final account and plan to pay the tax.
But beware if you submit a short account, your payment reference date will also change.
With normal accounts, the payment date is usually 9 months after the accounting period, if you submit a short account this will be apportioned.
But preparing your account on time at least helps you to know and prepare for the tax that is due for a short period.
You can decide to leave the company dormant or close it if you don’t have any plans to trade with the business.
If your company has a debt such as a bank loan or other creditors, you will not be able to close the company or make it dormant until such debts are cleared.
Deregister from all tax that is not required under IR35 legislation
Whilst you were trading with your limited company, you might have been registered under different tax systems.
Tax systems such as self-assessment for your tax returns, PAYE for your payroll VAT, etc.
You will need to contact the HMRC and inform them of your change in circumstances and deregister from the tax system.
You also need to pay outstanding taxes or make arrangements for payment.
Choosing your umbrella company under IR35 legislation
This is a very important part of the transition for contractors.
You need to ensure that the umbrella company is one that can be located or contacted if need be.
Check your payslips from time to time to ensure that you are not under any unknown tax avoidance scheme.
Remember this is your personal tax and it’s very easy to incur unplanned debt by not paying the right amount of tax.
Conclusion ON IR35 Legislation
Thanks for reading our blog, if you would like us to support you with this transition kindly contact us