Consultant Agreement & IR35 Review
What is IR35?
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.
This year, these rules are set to change in such a way that will likely result in the IR35 rules becoming more difficult to avoid.
Businesses and consultants alike are advised to get up to speed on the changes, which are due to come into effect in April 2020, to ensure they are not in breach of tax legislation.
LawBite can help!
Our expert IR35 lawyers can:
- We can check if your contract is legally sound and fit for purpose.
- Advice on typical questions on Consultancy (Freelancer/Contractor) Agreements.
Just £149 +vat for contracts up to 20 pages / 3-day turnaround.
Includes lawyer consultation to establish full requirements.
All lawyers are UK qualified, insured, regulated & experienced in small business legal matters.
What are the IR35 rules?
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.
When does IR35 start?
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, the responsibility will be on the client company to decide whether the IR35 rules apply.
Why was IR35 introduced?
IR35 was introduced to tackle the problem of ‘disguised employees’, who weren’t paying the correct level of tax.
Is IR35 the end of contracting?
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.
How does IR35 affect contractors?
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.
Will IR35 be delayed?
The UK Government has started a review into the IR35 changes coming into effect in April. The review is due to conclude mid-February, after which time we will have more information.
Is there an IR35 calculator?
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
Will IR35 hit the private sector?
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
Are umbrella companies IR35 compliant?
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.
What is the risk of IR35?
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.
How common are IR35 investigations?
HMRC carries out 250 new IR35 investigations in every tax year. They can investigate anyone, and do so on a risk-based assessment.
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