If you subcontract or are self-employed, you may have heard of IR35. This is the name given to the legislation that HMRC brought in to make sure that people who work through personal service companies pay the correct amount of tax.

What is IR35?

IR35 is a piece of legislation introduced to combat tax avoidance by workers employed through their own companies. The legislation determines whether an individual working through their own company is self-employed or should be taxed as an employee.

Who does IR35 apply to?

IR35 only applies if you provide services to a client through a limited company or another intermediary and would be classed as an employee if you offered those services directly to the client. Payments made to your limited company will be subject to both income tax and national insurance contributions, just as if you were an employee of the client.

What are the consequences of not complying with IR35?

If a worker’s company does not comply with IR35, they may be liable for unpaid income tax and National Insurance contributions. In addition, they may be subject to penalties from HMRC.

How can I ensure compliance with IR35?

Several steps can be taken to ensure compliance with IR35. These include:

  • Ensuring that the worker’s company is registered with HMRC
  • Providing HMRC with accurate and up-to-date information about the workers employed by the company
  • Keeping records of all payments made to workers

By taking these steps, companies and individuals can help ensure that they are compliant with IR35 and avoid any penalties from HMRC.

What is the future of IR35?

IR35 was reviewed in April 2021 and changes followed that review.

Therefore, companies should ensure that they are familiar with the legislation and take steps to ensure compliance. Failure to do so could result in penalties from HMRC.

As a subcontractor, you might be asked to prove that you’re self-employed.

This could include:

  • Contracts you have with clients
  • Invoices
  • Your website or marketing materials

If you work through an intermediary, such as a limited company, but would be classed as an employee if there was no intermediary, then IR35 applies. The rules ensure that people who work as employees but through an intermediary pay broadly the same Income Tax and National Insurance contributions as employees. If you’re found to be inside IR35, any payments made to you by your client will have Income Tax, and National Insurance deducted before you receive them.

You may work for a large organisation or in the public sector, then it’s likely that they’ll take responsibility for operating IR35. For example, they’ll determine whether IR35 applies to the contract and deduct Income Tax and National Insurance contributions before paying you.

If you work for a small organisation or in the private sector, then it’s likely that you’ll be responsible for operating IR35. You’ll need to determine whether IR35 applies to the contract and pay Income Tax and National Insurance contributions yourself.

It’s important to remember that the final decision on employment status rests with HMRC. If they believe that you have incorrectly determined your employment status and should have been operating inside IR35, they can open an enquiry into your tax affairs.

If you’re unsure whether IR35 applies to you, Pebble Contracting can help support you and ensure you are compliant.

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