IR35 is legislation from HMRC designed to address tax and National Insurance evasion by identifying contractors who are essentially 'disguised employees' within companies.
The Rationale Behind IR35
The inception of IR35 aimed to ensure fair taxation and National Insurance contributions by distinguishing between genuine contractors and those effectively acting as employees, yet benefiting from the tax efficiencies of self-employment. This differentiation is crucial since self-employed contractors typically pay lower National Insurance compared to employees, who also receive benefits like holiday and sick pay.
Objective and Impact
IR35 seeks to curb the practice where companies and contractors exploit tax efficiencies by operating as if the contractor is an independent entity, despite the working arrangement resembling employment. This not only affects the tax liabilities but also the entitlement to employment benefits.
Applicability of IR35
Primarily targeting contractors operating through limited companies, IR35's applicability depends on several factors indicative of employment, including:
- The necessity for the contractor to personally complete the work
- The contractor's obligation to perform tasks typically reserved for employees
- The degree of control the client has over the contractor's work regarding how, when, and where it is done
Answering 'yes' to these considerations may classify one as a 'disguised employee' for tax purposes, compelling the client to assimilate the contractor into their payroll system and subject them to employee tax rates.
Recent Changes
As of April 6, 2021, the responsibility to determine IR35 status has shifted to the clients in the public sector and medium to large private sector companies, ensuring they assess their contractors' employment status accurately for tax purposes.
