Are you self-employed and have no idea what is IR35? Self-employed or sole traders having their own limited company and Personal Service Company (PSC) may get into trouble with the HMRC. According to one estimate, more than 4 million people in the United Kingdom are self-employed or sole traders.
The self-employed persons enjoy the tax efficiency as compared to the employed persons. This is the reason, many employed people pretend to be self-employed when they are employed by a company in reality.
Their disguised employment motive is to evade taxes and National Insurance Contributions (NICs). Besides, it also helps the employer to evade the NICs and other employee benefits of sick pay and holidays.
To curtail this exploitation and discourage this behaviour among the employees and employers, HMRC introduced IR35 in April 2000. Let’s discuss in more detail what is IR35 and how it can affect Self-employed persons!
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What is IR35?
It is legislation passed against the employees working as self-employed persons to evade taxes and National Insurance Contributions (NICs). Employers and employees resort to this illegal channel to avoid paying taxes and enjoy tax efficiency ultimately.
However, IR35 investigates a person if he is truly a self-employed person or just an employee. If a person is found guilty of violating the IR35 have to pay hefty fees and charges. Appearing as self-employed provides the flexibility of work and they can enjoy the tax benefits.
What is a Self-Employed Person?
A self-employed person is one who works as a freelancer and enjoys control over how many hours he works and how many clients he is working with. On the other hand, he does not have to pay for the National Insurance Contributions (NICs) and other taxes.
A person can be self-employed through a sole trader or by establishing a limited company. On the other hand, he can become a partner in a limited company as a self-employed person. This is the reason, many employees pretend to become partners in a company when actually they are the employees.
How Does the IR35 Work?
IR35 works through two channels to determine the employment status of a suspicious person. For example:
- Inside IR35
- Outside IR35
Inside IR35
If you fall inside IR35, it means you have to pay taxes and the National Insurance Contributions (NICs) due to the employee status of your work.
Outside IR35
If you are outside IR35, it means you are a self-employed person and you don’t need to worry about the IR35 and any investigation by the HMRC.
What is Intermediaries Legislation?
Intermediaries legislation is just another name of IR35. It implies that a person is self-employed if working through an intermediary. An intermediary is a limited company from which a contractor or a self-employed provides services to its clients.
The other intermediary is the Personal Services Company (PSC). The third one is being the partial or full shareholder of a company. The absence of any intermediary means the person is an employee rather than a self-employed person.
Besides, a contractor can also work through a recruitment agency, working as an intermediary. For example, a PAYE or Umbrella Company will be an employee of these companies.
How to Determine the IR35?
There are certain criteria to measure if you are inside IR35 or outside IR35. Check employment status for the tax service to know exactly about the IR35. HMRC checks the status of the workers and contractors by centring their decision on the following factors:
Control
The control of a contractor on the deadlines, project selections and working hours defines the level of services. The unlimited freedom puts a contractor into the category of outside IR35. Conversely, limited or no control over these factors makes a contractor inside IR35 and thus an employee.
Substitution
If a person is replaceable and the client can hire a substitute for the services he delivers when the worker is unavailable, the person is self-employed. On the other hand, a person having no alternate worker for doing his services will be regarded as an employee.
Mutuality of Obligations (MOO)
Mutuality of Obligations depends on two determining factors. For example, a person has been offered a job to complete or his employer is obliged to offer work to another person or client. Either the missing factor puts a person into the category of self-employed or the presence of these factors leads to the status of an employee.
The Bottom Line
The bottom line is that IR35 is designed to identify the employees working either as self-employed or contractors. For the purpose of avoiding National Insurance Contributions (NICS) and to enjoy tax efficiency, many workers pretend to be contractors.
However, HMRC has used a clever way to detect these persons and make them obliged to pay taxes and NICs on their incomes. Every self-employed person must check their working status on the website of HMRC to avoid any penalties.
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Disclaimer: All the information in this article on What is IR35, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.