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IR35 Contract - what you need to know

The Intermediaries Legislation, or IR35, has been around since 2000. The aim of the legislation is to remove the tax advantages that come from individuals providing services via a limited company, who are actually ‘disguised employees’ working for a client company.

Contractors and client companies alike commonly spend time ensuring that they do not fall foul of the off-payroll working rules, otherwise known as IR35.

Changes to off-payroll working rules (IR35) are scheduled to come into effect from 6 April 2021 – postponed from 2020 due to the coronavirus. There has been further deferment to 2021 or later.

Businesses and consultants alike are advised to get up to speed on the changes, which are due to come into effect, to ensure they are not in breach of tax legislation.

To avoid a fine for unpaid taxes, it is important that your business’ contracts are fully compliant with existing and upcoming regulations.

Our IR35 contract review services can help you ensure your contracts are compliant, and all company working practices are detailed in the terms and conditions of the contract, with further checks of contract clauses to ensure compliance.

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Frequently asked questions

LawBite is the modern way for SMEs to get the high quality legal advice they need, but faster and cheaper.

As we look to revolutionise the traditional legal process, this may raise a number of questions on how we operate to provide your business with legal advice for your business that is; easier to access, clearer to understand and more affordable.

We have brought together the most frequently asked questions from our customers.

The IR35 rules are otherwise known as the Off-Payroll Working Rules. They apply to individuals who provide services to a company through an intermediary (normally a personal service company).
These individuals are often called ‘disguised employees’ and ensure that those individuals pay the same income tax and national insurance as regular employees.

Yes, and it currently impacts the private sector. The changes to IR35 will impact large and medium private organisations, which is any business which meets two or more of the following criteria:

Annual turnover is more than £10.2 million
Balance sheet total is more than £5.1 million
More than 50 employees

IR35 was introduced to tackle the problem of ‘disguised employees’, who weren’t paying the correct level of tax.

Not necessarily – if you are a legitimate contractor, with multiple clients and you are genuinely a service provider for an organisation, then the IR35 rules likely will not apply to you, and you can still operate as a contractor.

If you are a contractor that operates through a limited company, for only one client, or you are, in reality, an employee of your client, you will likely to be treated as an employee for tax purposes. This means that your client will have to start holding back income tax and national insurance from your fee.

Umbrella companies do not ‘solve the IR35 problem’. If you work as an employee for an umbrella company, you will be treated as an employee, and will pay income tax and national insurance at the source.
If you work through your own limited company, via an umbrella company, but you fall within the IR35 rules, you will also be treated as an employee, and taxed accordingly.

HMRC carries out 250 new IR35 investigations in every tax year. They can investigate anyone, and do so on a risk-based assessment.

If you do not pay tax as an employee, but are within the scope of the IR35 rules, the penalty is 30% of unpaid tax, for a careless error. For deliberate errors, the penalty is 70% of unpaid tax. The penalty is 100% of unpaid tax if you knew you were inside IR35, deliberately did not calculate the right tax, and tried to cover up the underpayment.

In order to avoid the risk of penalties, we recommend undertaking an IR35 contract check to ensure that your contracts are legally valid.

HMRC has made available a useful survey which can help you determine whether you or your contractors fall within IR35: https://www.gov.uk/guidance/check-employment-status-for-tax

The IR35 rules are already effective, but the responsibility for making sure the individual is paying the correct tax lies with the individual. However, from 6 April 2020, the responsibility will be on the client company to decide whether the IR35 rules apply.

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