What Is The IR35 Tax Legislation
When it comes to dealing with your personal tax there are a number of legislations to be aware of but one of the most important one for contractors is IR35.
What is IR35 Tax Legislation?
The IR35 legislation was introduced in the year 2000 to prevent what is known as ‘disguised employment’ and is designed to stop people from fraudulently claiming to be contractors instead of employees when working within their own limited companies as a way to gain tax benefits.
Under IR35, contractors working in a way that could be deemed employment are taxed at a higher rate to more closely match the tax rate for full-time employment.
HMRC doesn’t make it very clear what the difference between working as a contractor and an employee is within a business which can make it difficult for people to know if they are compliant under IR35 law leading to many contractors falling foul of the legislation unintentionally.
Does IR35 affect you?
If you are a self-employed contractor but work through your own limited company or a partner then you need to educate yourself on the IR35 reform to ensure that you are not breaking the law.
Previously contractors used to be able to set their own IR35 status within the public sector but in 2017 this changed to stop contractors from abusing the system by trying to avoid paying the higher tax rate and instead a reform was introduced.
Currently, only the public sector uses a reform but it is due to be introduced to the private sector from April 2020.
What should you do if you are confused by IR35?
Even after some serious online searching, you may find that you are still very confused about whether or not you are affected by the IR35 legislation.
The language used online can be complicated and confusing and there isn’t a lot of guidance provided by HMRC.
As this legislation is so complex and the outcome can vary on a case by case basis, information regarding it is scarce it is often advised that contractors seek professional IR35 accounting services from QAccounting or similar providers who are experts on this area of tax law.
Many of these accountancy services offer fixed rates to help contractors understand whether they are or are not compliant and could save the individual thousands in penalty fines.
What happens if you don’t comply with IR35?
Working within IR35 may be less financially rewarding for contractors but failing to comply with the legislation completely can be a lot more financially devastating if you are investigated by HMRC. If you are found to be non-compliant then you will not have been paying your taxes correctly and may be asked to pay a backdated tax bill which will include interest and a possible penalty charge.
If you receive an investigatory letter from HMRC and you are a contractor then it is vital to seek professional help as soon as possible so that they can help you to understand your status within IR35.