What is IR35?
The IR35 legislation was introduced in the early 2000s with the intention of tackling the key issue of tax avoidance. It aims to prevent individuals from avoiding paying their taxes, who would normally be recognised as employees (for tax purposes), instead offering their services through an intermediary like a personal service company (PSC), considering themselves self-employed. By doing this, the person can avoid liability for income tax and national insurance. This was a big problem at the time, mostly due to the lax system surrounding this area of tax. If you need support with IR35 queries with clear and practical advice from solicitors in Chester, contact Aaron and Partners today.
What does the IR stand for in IR35?
IR35 is the abbreviation for the anti-tax avoidance legislation, the IR stands for Inland Revenue and the number 35 is the press release issue number. IR35 is headed up by Her Majesty’s Revenue and Customs, which merged with Inland Revenue in 2005.
Why is it important to stay compliant with IR35?
Not complying with IR35 legislation could mean you end up with expensive costs when you need to defend yourself against enquiries from HMRC, which will add up quickly if you don’t have an insurance policy. Also, you could potentially have the burden of paying the cost of any taxes you haven’t paid if you are caught by the legislation. Anyone can be investigated by HMRC, and if you are inside IR35 but have paid tax as an outside contractor, you will have to pay back the tax, interest, and any penalties because of this.
How to stay compliant with IR35
There are a number of steps you can take in order to be compliant with IR35 legislation, these will be especially important if you are entering into a contract. The steps are:
· Reviewing all engagements for IR35 status, meaning you will have an assessment of both the written terms and working practices and comparing them against the important factors that determine your IR35 status.
· Make sure that your working practices are in line with what is detailed in your contract, the reality of engagement will carry more weight than the written terms. So, you need to be completely certain that your contract is an accurate depiction of the engagement.
· Keep a record of your due diligence, this could include copies of third-party contract reviews, a Confirmation of Arrangements and/or communications that are relevant and could help provide evidence of your position.
· Ensure you pay the right tax and national insurance for your status, keeping compliant with IR35 has often been mixed up with being ‘outside IR35’ but compliance typically means paying the correct tax for your employment status. Therefore, if you are working ‘inside IR35’ for an engagement, then you need to make a deemed payment.
· Conduct regular, up-to-date assessments of your engagements as it will help to ensure reassessments throughout the engagement or if there are any material changes.
· Look out for any new developments or news of changes or updates to how status is determined.
In April 2021, the IR35 legislation had some alterations made to it which meant that it is not always the responsibility of the contractor to work out their status. However, contractors should still prioritise making sure they are compliant within their engagements. Keep in mind that the changes don’t apply to any engagements with companies that are categorised as small in accordance with the Companies Act 2006 and contractors are still liable for any services they provide prior to April of 2021.