IR35 and the Off-Payroll legislation are two separate items of tax legislation aimed at countering perceived tax avoidance, specifically targeting limited company contractors and the firms that hire them.
IR35 is the short name used for the ‘intermediaries legislation’, which is a set of tax rules that apply to you if you work for a client through an intermediary – which can be a limited company or “personal service company” which is how many contractors operate.
If you are caught within the legislation then you can expect to pay about 25% more in tax every year, so you want to try and ensure that it does not apply to you!
Despite having been in force since 1999, it is heavily criticised by tax experts and the business community as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuine small businesses.
If you are a genuine professional contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to fear from IR35. This is so long as you take the time to understand how the legislation works and apply best practice to ensure it does not apply to you, and have a defense prepared if investigated by HMRC.
For a contractor, being found ‘inside IR35’ could mean a reduction of tens of thousands of pounds of contracting income per year, without receiving the necessary employment rights that their deemed employment status would permit.
Under the Off-Payroll legislation, firms that engage contractors deemed to be within scope of the rules will also have to fund additional employment taxes, on top of the fees paid for hiring contingent workers. If you are a genuine professional contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to fear from IR35 or Off-Payroll.
This is so long as you take the time to understand how the legislation works and work with clients who are prepared to treat you fairly. The current legislation is highly complex and differs from the original IR35 legislation. The main difference is that under the new rules the vast majority of the extra tax payable (e.g. Employers National Insurance) is payable by the hirer on top of the fees paid to the contractor. Under the old rules, this part of the tax was paid by deducting it from the contractor's fees. This was a significant change.
Contractors and hirers who are considered "inside IR35" pay significantly more tax. The best option is to speak to KFS Accountants to discuss, as each circumstance is unique, or download are free ‘Personal Service Companies and IR35’ Information leaflet from the Factsheet menu option.
