IR35, also known as Intermediaries Legislation, is a set of off-payroll UK tax rules. The main aim of IR35 is to determine whether or not contractors are actually self-employed, or should be classed as employees. Understanding IR35 is important, especially for contractors. To learn more about IR35, continue reading.
When Was IR35 First Introduced?
IR35 was first mentioned in 1999 and introduced in 2000. It was introduced to help workers tackle tax avoidance. These tax rules were created to prevent employees from acting in disguise to try and benefit from certain tax advantages.
Since coming into play, IR35 has faced two major changes – the first being in 2017 and the other more recently in 2021. Since its first mention, IR35 has faced some backlash over the years.
A group named IPSE, previously known as The Professional Contractors Group, actually formed when IR35 was announced to fight against it – but the court found against the group in the following year, 2001.
The Timeline of IR35
Although introduced in 2000, IR35 had its first mention the year before. After full legalisation came into effect around April 2000, a few changes have happened since – from improvements being made in 2011 to public sector reforms being introduced in 2017. However, more major key events have taken place over the past two decades.
Who the Off-Payroll Tax Rules Apply to
Off-payroll tax rules apply to a set of individuals, including:
- Workers who provide services through their own intermediary to clients
- Clients who receive services from workers through their intermediary
- Agencies or suppliers who provide services through their intermediary
Workers who are affected by these regulations typically provide their services through a partnership, a limited company, or another individual. Although off-payroll rules also apply to employees who work for both small and large businesses, they differ slightly.
However, there are some small businesses that the rules don’t apply to. To be exempt from the rules, your small business would have to meet certain criteria, such as having an annual turnover of less than £10.1m, gross assets of less than £5.1m displayed on your balance sheet, and having a team with less than 50 employees.
If you don’t meet this criteria, it’s likely your small business will be subject to IR35 rules. Off-payroll rules apply when someone (a worker) provides a service through their own intermediary – which is usually a limited company.
If the rules apply, it’ll depend on several factors, such as whether a client is in the public, private, or voluntary sector, or operates a small business.
Inside IR35 vs Outside IR35
Being inside or outside IR35 is determined mainly by whether you’re considered an employee or are self-employed.
- Inside IR35 – you’re treated as a regular employee regarding taxes
- Outside IR35 – considered self-employed
Inside IR35 means you pay Income Tax and National Insurance through PAYE (unlike self-employed individuals, who aren’t paid through PAYE). Typically, those inside IR35 take home a smaller wage compared to those who are outside IR35.
When you’re inside IR35, someone will pay your wages to you, but when you’re outside IR35, you can usually pay yourself a salary and dividends. HMRC will determine whether you’re inside IR35 or outside IR35. They do so by looking at individual contracts.
For example, if HMRC finds that a contractor is treated the same as a regular full-time employee, they will consider them inside IR35.
IR35 Non-Compliance Penalties
Paying the correct tax in line with your employment status is vital. Contractors who are caught with an incorrect employment status could be subject to investigation by HMRC or face numerous penalties, such as:
- Having to pay back 30% of unpaid tax if HMRC feels that you were careless about your employment status
- Having to pay 70% of unpaid tax if HMRC finds that you were in fact aware you were inside IR35 but chose not to act in the correct way
- Having to pay all unpaid tax
HMRC have the right to investigate you if they believe that you’ve avoided paying tax. They can investigate your working practices in detail, as far back as two decades if needed.
How Can DH Business Support Help?
Understanding tax rules can be complex, but we’re here to help. At DH Business Support, we offer expert tax advice to clients. Our professional service allows you to clearly understand tax and how it works.
Beneficial for all, our tax advice equips you with the knowledge you need going forward as you manage your tax payments. We can discuss off-payroll UK tax rules with you and help ensure your taxes are being paid on time and correctly. To find out more, we encourage you to contact us today.