What is IR35?
IR35 is a piece of tax legislation which came into force in July 2000 and was introduced to ensure that workers are operating correctly therefore preventing tax avoidance.
Does it apply to me?
IR35 will apply to workers who supply their services through private limited companies or partnerships and pay themselves dividends. If this is the case then you need to consider the implications of this, starting with establishing if you are “inside” or “outside” IR35.
The legislation has also been extended to ‘office holders’ for tax purposes. From 6th April 2013, where a worker provides their personal services to a client via an intermediary to fulfil the duties of an office, the income from those services should be subject to PAYE and NIC’s as employment income.
Office holders are usually those at senior level holding specific positions in organisations.
IR35 would not apply to you if:
- You pay employed levels of PAYE and NIC’s, as an employee under umbrella company agreements or being paid directly by an agency or client.
- You are self-employed, you will then need to consider whether you are genuinely self-employed. More information on this legislation can be found
What does “inside” and “outside” IR35 mean?
If you are inside IR35 then you should be paying employed levels of tax.
If you are outside IR35, you may choose to pay yourself a combination of salary and dividends.
How do I know if I am inside or outside IR35?
This can be one of the most difficult questions to answer, however in principle you are inside IR35 if you are effectively working as an employee at the place of work, even if your contract describes you differently. You are outside IR35 if you are genuinely in business on your own account.
In practice things can be more complex than that. HMRC provide guidance to help workers determine if they fall inside or outside the legislation.
However, in practice IR35 investigations are considered on a case-by-case basis. There have been some high-profile investigations where workers believed they were outside IR35 and HMRC found them to be within it which you can read over.
Can I ensure my contract assists me in falling outside IR35?
You can contact The Cinch Group and we can review your contract and advise further. This will not secure your status as outside IR35, HMRC will make its own judgement on how you work in reality when reviewing the working practices between yourself and the end client.
Can I ensure I am not investigated?
HMRC carry out standard checks on workers as part of their policy and these are done at random so there is no way to guarantee that you will not be investigated.
Investigations into IR35 will usually start with standard corporation tax and VAT enquires. Therefore to keep a low profile with HMRC you should ensure that your accounting records are kept up to date and taxes are paid on time.
What if I am definitely inside IR35?
If this is the case then many workers use an umbrella company, another service offered to workers by The Cinch Group. You will then be employed by our umbrella company, we will deduct the relevant employment tax and pay this across to HMRC on your behalf, still helping you to maximise your take home pay. This means that you do not have to worry about IR35.
Does an umbrella company reduce my tax bill?
Working through an umbrella company would result in you being taxed in the same way as any other employee. The savings then come from tax relief on expenses. With our umbrella company we will calculate tax relief on your allowable expenses once we have the receipts, this can be a copy however we advise you retain the original for at least 6 years.
Does a limited company reduce my tax bill?
If you are operating outside IR35 and genuinely running your own business then setting up a limited company is more tax-efficient because you can also take income by way of dividends which are not subject to national insurance.
However if you are found to be inside IR35, then this can result in you repaying the tax savings along with interest and penalties to HMRC.
For further information on IR35 please contact our Legal Team on 01925 594 929.
Guide to understanding IR35