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IR35 explained

May 4, 2020

As a tradesperson, there are many legalities you need to understand and comply with within your business. IR35 is one of them. It’s a piece of legislation that allows HMRC to collect additional tax where a contractor is an employee in all but name.

If you’re trying to understand and navigate the information that comes with IR35, you’ve landed in the right place. We understand that many of our tradespeople may have more time on their hands due to the current situation with COVID-19. As part of that, you may be looking to better understand IR35 status. To help, we’ve put together a guide that explains what IR35 is, alongside some resources you may find useful.

What is IR35?

IR35 is a tax law which is also known as intermediary’s legislation. This set of rules applies to tradespeople who work for a client through an intermediary (such as a limited company), who would otherwise be an employee. Introduced to combat tax avoidance, this tax law came into place in April 2000 and was reformed in April 2017.

If you work as a contractor, it’s important to know your status. You should ensure you understand whether your assignments are ‘inside’ or ‘outside’ the rules.

If a job is ‘inside IR35’, you will need to pay the correct employment taxes and National Insurance Contributions (NIC) as if you were employed directly.

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How do I find out my IR35 status?

In the public sector, the organisations themselves must determine the IR35 status of their contractors. This includes publicly funded organisations and institutions such as schools and hospitals.

However, if you accept a contract within the private sector, in which organisations are privately run for profit, the responsibility to determine status lies with you. It is worth noting that this is due to change after April 2021.

If you are providing your services through a limited company, HMRC need to be fully aware of the relationship through which you are carrying out the work. This is to ensure you’re not using the limited company to disguise the relationship of an employer and employee.
Getting to grips with IR3

In general, these rules don’t apply to anyone working as a sole trader business who pays Income Tax and National Insurance through the annual Self-Assessment process. However, it’s different if a sole trader works on a contract basis for a client that could be deemed to be employment-based. In this case, the end-client would be seen as the employer and liable for unpaid employment taxes.

To check the IR35 status of a contract assignment, whether you’re a contractor, an employer or a recruitment agency, we recommend using these IR35 calculators.

Why is it important?

HMRC are able to investigate your business at any time. The financial impact of IR35 can mean you have to pay Income Tax and National Insurance Contributions (NIC) from past jobs, whilst also reducing future earnings. If you have been disguising work to be ‘outside IR35’ rules, or even unaware you were going against the rules, HMRC can also apply financial penalties.

For more information, Crunch has created an IR35 hub, providing a range of content including guides and videos on the subject. They also have an IR35 calculator tool that will help contractors understand whether they’re affected by this legislation.

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