For anyone acting as a contractor, it’s essential to understand IR35 legislation and its impacts on employment status.
Also known as off-payroll working rules, IR35 can be challenging to wrap your head around. But as IR35 accountants, we can help you accurately determine your employment status while minimising your tax obligations.
What is IR35?
The UK Government first introduced IR35 rules in April 2001 in an effort to combat tax avoidance from ‘disguised’ employees.
This legislation affects workers who supply their services to clients via an intermediary (such as a limited company) to benefit from reduced tax liabilities, but who would otherwise act as an employee.
Understanding personal service companies
Many freelancers or contractors opt to work through personal service companies (PSCs). PSCs are not defined by law, but they generally describe limited companies run by a single director who handles their work independently.
This business structure can offer more tax and financial planning opportunities for contractors. For instance, a contractor can manage multiple client contracts, achieve potential tax savings, and have more say over how they withdraw and reinvest their earnings. However, these opportunities changed when IR35 rules were introduced.
In short, IR35 aims to identify ‘disguised employment.’ This means if you’re working similarly to an employee but through a company, you might be deemed inside IR35 for tax purposes, potentially resulting in a higher tax bill.
It’s a subtle yet crucial distinction. Say you have a contract with a single client and you work onsite, use their equipment and take instructions from the client, similarly to an employee. In this case, you may be deemed an employee and invoicing the client may be considered disguised employment.
What’s more, your contracts need to reflect the true nature of your working relationships and business engagements.
This is where expert guidance from IR35 accountants like Smith Butler becomes invaluable. We can help you navigate the complexities of this legislation, helping you structure your business in a way that keeps you compliant and minimises your liabilities.
Who is responsible for determining employment status?
In April 2017, a reform shifted the responsibility for determining IR35 status from the contractor to the public sector organisations accessing their services. A further reform in April 2021 extended these regulations to medium and large businesses in the private and third sectors.
As a result, contractors increasingly rely on clients to correctly determine and report their employment status instead of handling it through their intermediary. The main exception to this rule is when a contractor works for a small enterprise. In this instance, the burden generally falls on the intermediary itself.
How can I determine my employment status?
While determining employment status may seem straightforward, the term carries heavy implications in the realm of contracting. Under IR35, self-employed contractors and deemed employees face different tax obligations.
For instance, if you’re deemed inside IR35 for a particular contract, you’re treated as an employee for tax purposes, even if you’re working through your PSC or other intermediary. This means you need to pay income tax and National Insurance contributions at the same rate as a typical employee.
Conversely, being outside IR35 means you’re operating as a ‘genuine’ business. This means you can pay tax as a self-employed individual, allowing you to draw income from your business in a more tax-efficient way.
No matter who is determining your status, it’s important to tread carefully. Mistakes or misjudgments can lead to significant tax bills and potential penalties. Working closely with your client and a trusted accountant can help you structure your working arrangements in a tax-efficient way – but following the rules isn’t always straightforward.
HMRC provides a free employment status tool if you’re unsure whether a contract falls inside or outside IR35, but you should always speak to a professional to make sure you are compliant.
Unlocking the value of IR35 accountants
IR35 rules can sometimes feel like a maze, but help is always nearby. As specialist contractor accountants fluent in IR35 legislation, we can look after you and your business interests so you stay compliant and optimise your tax position.
It doesn’t matter if you’re providing services as a self-employed individual or through an umbrella company or PSC; you still need to know how IR35 affects you.
We won’t just dot the ‘i’s and cross the ‘t’s, we’ll provide strategic oversight and tactical advice that aligns with your business structure and needs. Our guidance can shield you from potential pitfalls and give you peace of mind that you’re always on the right side of the law.
Your partner in contracting
At Smith Butler, we combine our financial acumen with the latest technology to give you an outstanding accounting service that puts your needs first. Our team of seasoned IR35 accountants are ready to help you.
Together, we’ll ensure that your contracting venture remains compliant, financially robust, and poised to adapt and thrive in the future.
Contact us for advice on IR35.