IR35 is a term that describes two groups of tax legislation that helps to combat tax avoidance by employees. This set of tax laws forms part of the Finance Act. It came into force in April 2000 and is widely called the Intermediaries Legislation. This term is derived from the original press that got released by the Inland Revenue (now HMRC) that announced its creation.

If employees are caught by “Her Majesty’s Revenue and Customs”, then they will be liable to pay income tax or IR35 tax. Such employees will also need to pay National Insurance Contributions as if they were employed by the company. It can lower the net income of the limited company contractor by up to 25%.

Due to this reason, the Government has started replacing IR35 regulations with a new Off-Payroll Tax that was first introduced in April 2017 and will extend from the public sector to the private sector from April 2021. A genuine contractor, interim, consultant, and freelancer don’t have to fear IR35.

It is important for employees to know about the IR35 rules and how it is implemented. This will help them to follow best practices and getting penalized by HMRC. In any such event, they should have a proper defence strategy for handling it.

Companies that recruit workers, where the new Off-Payroll Tax is applicable, should not fear the new IR35 legislation as long as they take the necessary steps during recruiting and engaging their workers.

Whether you are a start-up or an enterprise, Transformify will help businesses of all sizes to recruit, manage and make payments to employees, contingent workforce, and remote teams. It provides an efficient off payroll management system that verifies and proofreads each invoice manually to avoid tax compliance, penalties, payouts to wrong bank accounts, messed up currencies, transposal errors, and other issues, etc.

Part 2. What are IR 35 and Off-Payroll Tax?

Let us understand the Off-payroll working rules for IR35 contractors, clients, and their intermediaries. The off-payroll working rules are applicable when the worker offers their services via their LLC or other types of intermediate to the client.

This intermediate firm could be any of the following:

• a partnership
• an individual, or
• a personal service firm

The rules ensure that workers in the company if provides services to the client pays the same amount of National Insurance contributions and Income Tax as employees. In this case, the client is the organization that receives the services of the contractor. The client is accountable to determine whether or not the off-payroll working rules are applicable.

All medium-sized and large-sized private sector clients and public sector authorities are accountable to decide whether or not the legislation is applicable. IR35 Contracting rules apply when a worker provides services to a client via an intermediary. He would be categorized as an employee when contracted directly.

The HMRC IR35 regulation applies to the following:

• a worker that offers their services via their intermediary
• a client who obtains services from a contractor via their intermediary
• an agency that offers contractor’s services via their intermediary

As per IR35 explained, if the regulation applies, contributions made to employee National Insurance and Income Tax will get subtracted from fees. This amount will be paid back to HMRC. Along with it, Apprenticeship Levy and employer National Insurance contributions must be paid to HMRC.

To be IR35 compliant, you can check employment status for Tax service. It will help in deciding whether or not the off-payroll working rules are applicable. The employment status will be used for the determination of the taxes that the client and worker are liable to pay.

Part 3. Importance of IR35

IR 35 can impact and benefit the organization in the following ways:

• The major significance of IR35 was to deal with the issue of ‘deemed employment. It helps organizations recruit workers through an intermediary than on an employment contract. Such employees are called disguised/deemed employees. It helps companies save on a large amount of cash as they do not need to pay for the employers’ NICs, employment benefits/rights, and the Apprenticeship Levy.
• IR35 plays a remarkable role in defending the rights of workers from dishonest employers and the Treasury from missing tax produce.
• IR35 Shield helps in offering guidance about the IR35 status. This regulation comprises of three principles to regulate the status of employment from the “Ready Mixed Concrete case” that is called as principal tests of employment.
• Control: It shows the level of control that the client has over what, when, how, and where the contractor executes the work
• Substitution: This imply a personal service carried out by the worker, or whether or not the company can send an additional worker in their place
• Mutuality of obligation: It is a concept wherein the employer has the duty to provide work, and the worker has the obligation to accept it.

In addition to the above factors, there are a few more factors taken into consideration for determining whether or not you are caught via IR35. This comprises the type of contract, whether or not you take a monetary risk if you are being in business on your account, a part of the engager’s organization, and provider of equipment.

Part 4. Summary

The financial impact caused by IR35 can prove to be significant.  After its introduction, it was heavily criticized by the business community and tax experts. Many of them had the opinion that it is poorly conceived, badly executed by HMRC. This causes unnecessary hardships and costs for authentic small-level businesses.

The main objective of this regulation was to deal with the issue of ‘deemed employment. This is the type of employment where organizations get assistance from workers on a deemed or “self-employed basis” via an intermediary.

There isn’t any way that IR35 regulation can be evaded by firms. It is by recruiting them as if the regulation applies to them, and pays over all the additional employment taxes. Firms that hire self-employed contractors are not affected by IR35.