| What is IR35 and why was it introduced? | | | | the specifics of each case - the turnover of your |
| In order to understand how it works, we must | | | | company, the amount taken by the |
| consider the commonplace business relationships.. | | | | shareholder(s) as salary, the amount distributed as |
| In many cases these will be: | | | | a dividend - but as a very rough guide, the likely |
| This relationship will be documented by two | | | | cost to you will be equivalent to the Employer's |
| contracts: the one that the agency signs with the | | | | and Employee's National Insurance Contributions |
| End Client to find the resources which will allow | | | | not paid as a result of paying dividends, plus |
| the End client to complete the project; and the | | | | interest and if they can, HMRC will also seek to |
| contract that the Agency signs with the | | | | levy a penalty. This could add at least another |
| Contractor's Limited Company. More will be said | | | | 25% to your tax bill. |
| about these elsewhere later, but the first thing to | | | | The IR35 'Deemed Salary Calculation. If you wish |
| notice is that there is no contract between you, | | | | to know how the Deemed Salary Calculation |
| the Contractor, and the End Client. | | | | works, then please view the Deemed Salary |
| What, however, IR35 seeks to do, is create a | | | | Calculation page, which is taken from HMRC's own |
| hypothetical contract between you, the | | | | website, but in essence once a small allowance |
| Contractor, and the End Client to establish what | | | | has been made for expenses, the remainder will |
| the relationship would be if you were engaged | | | | be deemed to be your gross pay and the |
| directly by the End Client. | | | | Employer's NIC due to HMRC. |
| Would it be a Contract of Service?, i.e. | | | | Determining your IR35 Status. As you can |
| employment (the master/servant relationship) | | | | imagine, being reclassified as caught by IR35 is a |
| Or | | | | painful and expensive experience; please see the |
| Would it be deemed a Contract for Services?, i.e. | | | | Professional Expenses Insurance to find out what |
| self employment | | | | Freestyle Accounting have put in place to make |
| Intermediaries legislation. How, HMRC and indeed | | | | sure you are given every opportunity to fight |
| we on this side of the profession determine the | | | | your case successfully and not succumb to a |
| status is demonstrated below. However, we | | | | huge tax bill. Please read our article on determining |
| would just like to finish this section by considering | | | | your IR35 status to understand what HMRC will |
| what the implications are of you being "caught | | | | be looking for. |
| by", or deemed to be "inside of" IR35; i.e. your | | | | IR35 was introduced because the Government |
| relationship with the End Client is deemed to be a | | | | believed that some contractors were providing |
| 'contract of service'. | | | | their services through a limited company or a |
| Essentially, you will be deemed to be an employee | | | | partnership as a means of avoiding tax and |
| - but not of the End Client, nor of the agency, | | | | national insurance contributions (nics). The IR35 |
| they are both off the hook - it will be your | | | | legislation effectively seeks to determine what |
| company that will have to meet the additional tax | | | | the relationship would be if you were engaged |
| liability under the Deemed Salary Calculation. It is | | | | directly by the End Client; in short it asks the |
| impossible to quantify with any accuracy what | | | | question - are you an employee "disguised" behind |
| that additional tax burden will be without knowing | | | | your limited company? |