What is IR35 legislation?

 

IR35 is a type of tax legislation introduced in the UK in April 2000. It has remained fairly controversial throughout its life and recently discussions have been had about its reform.

IR35 is intended for tax contractors who are working via an intermediary, such as a company or partnership. It aims to look behind a business set-up to ensure that the person is actually paying the right amount of tax contributions.

IR35 test

The IR35 legislation was introduced in the face of the Government’s assessment that small limited companies were being used to disguise employment, and thus minimise tax payments.

IR35 therefore applies in situations that would otherwise be known as employment. If people fail the 'IR35 test' by way of the terms and conditions of their employment, or working practices, such that they are deemed to be of employment then they will be caught by IR35 legislation.

The IR35 test centres on whether or not the worker is effectively an employee. This assessment will be made up of considerations regarding the day to day operations of the contractor and the contract.

Why bring in IR35?

Prior to the introduction of the legislation, workers could avoid being taxed as an employee on payments for services by providing those services through an intermediary.

Through the intermediary, normally a Personal Service Company, the worker could pay themselves in the form of dividends rather than a salary.

As dividends are liable neither to PAYE nor National Insurance Contributions (NICs), individuals using this method of payment and business structure were able to pay less tax than regular employees on the same income.

What happens now?

Under the IR35 legislation, the dividends or other payments received by the individual can be considered as "deemed salary" and taxed as if it were regular salary income.

UK citizens have a wide range of tax obligations under various UK tax laws. Before continuing a business as a self-employed person or contractor, it is advisable to seek financial and legal advice on your taxation obligations.

Has the Inland Revenue contacted you about your tax status? Do you need advice on IR35 legislation? Contact Law can recommend a specialist tax solicitor to inform you of the best tax status for you. Please call us on 0800 1777 162 or complete the web-form above.

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