
Let's go back to basics - what actually is IR35?
IR35 legislation is intended to tax disguised employment – essentially those payments from a client via a limited company and actually the relationship is such that should that person have been paid directly by the client, they would be seen to be an employee of a company.
The most common group this would impact are contractors functioning through a limited company. They usually pay lower income tax and they do not have to pay national insurance contributions. They can also claim certain expenses to lower their tax burden.
IR35 was designed to avoid contractors operating as a limited company when they are in in essence employees.
What did the legislative reforms intend to do?
In 2017, reforms were introduced in the public sector which altered the responsibility for defining whether a contractor fell within IR35 from the individual to the client organisation. In April 2021 additional reforms extended this to the private sector as well.
In April 2023, the above will be repealed and subsequently the responsibility for the determination of IR35 and the tax liability, will move back with the contractor and away from the end client.
I am a small business - am I also impacted?
A business will be exempt if at least two of the subsequent measures are reached:
Turnover of no more than £10.2 million
Balance sheet of no more than £5.1 million
No more than 50 employees
So how do I clarify my status?
HMRC guidance lists several features to be consider. However, there could be other aspects of the relationship too and it is vital to look at this holistically. The factors mentioned by HMRC include:
Control
Personal service
Equipment
Financial risk
Basis of payment
Mutuality of obligation
Holiday pay, sick pay and pension rights
Part and parcel of the organisation
Rights to terminate the contract
Opportunity to profit from sound management
Personal factors
Length of engagement
The intention of the parties
HMRC has also produced a handy online tool to assist with defining whether HMRC would treat a contractor as an employee or self-employed for tax purposes.
And what does this mean for umbrella companies?
As contractors will not be able to work through their own limited company, there is going to be an increase in demand for the use of umbrella companies. So typically an individual will be employed by the umbrella company and be paid via the payroll of the umbrella company. The contractor will now receive statutory benefits, such as statutory sickness pay and maternity/paternity/adoption pay. The contractor will still maintain the ability to be flexible and work for various clients.
I am still confused - where can I go?
Well let's have a chat about how your situation and bring you some clarity
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