What is IR35 & What Does It Mean For Contractors?

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What is IR35

Correctly titled Intermediaries legislation, the government introduced IR35 back in April 2000. It was introduces as a way of handling a growing problem known as disguised employment. This involved employees setting up Limited Companies as a way of reducing their tax bill. While still working in the same role as they were when they were considered a permanent employee.

Professionals in the IT industry, a booming industry back in 2000, were known for adopting this approach. It was termed as the ‘Monday to Friday’ phenomenon. This meant that employees were known to leave work at the end of the week and return on Monday as an independent contractor, even though their responsibilities or role had not changed.

HMRC did not look favourably on this tactic as it was seen to be an attempt to avoid paying tax. As a result, the IR35 legislation gives HMRC the ability to look through a Limited Company’s structure. A worker would be considered a disguised employee, leaving them to pay the same tax and national insurance at the rate that a permanent employee would pay.

Therefore, IR35, which was only applicable to those contractors in the public sector, has now expanded to the private sector.

How Do I Know if IR35 is Applicable to Me?

There is a wide range of factors that have to be considered when identifying your IR35 status. However, there are only three main considerations that you have to make.

The first is Supervision, Direction, and Control. This relates to whether someone else is giving you direction while you carry out your work. If you are working under a manager or a supervisor, or someone can give you instructions that relate to when you work or how you work, then this would mean that you are a disguised employee.

Next is Supervision, because this relates to whether you on your own are expected to complete the contract or whether you are entitled to send someone in your place to complete the work instead. If you are unable to send someone in your place, then this might be considered as employment.

Mutuality of obligation relates to the fact that you are expected to accept any offered work. What’s more, is the client expected to provide work? If this is the case, then you are going to be considered as being inside IR35.

Where Does This Leave Contractors?

Contractors operating within their own Limited company are common. This is done to enable them to deal with contract income, and with that comes a range of tax advantages. This means that you will receive more of the money you earn.

However, for those contractors operating within IR35, there is an additional tax requirement placed on them. This means that they won’t benefit from the above. All of the benefits of a Limited company will be lost because they will be required to make a ‘deemed salary’ payment. This means that the company will need to pay tax, NI, and Employer’s NI to HMRC at the end of the tax year.

What this means is that contractors are now choosing to operate under an IR35 umbrella company. As a result, the administrative tasks are reduced. While take-home pay will be higher when making deemed salary payments within IR35.

Is IR35 Applicable to Umbrella Employees?

One of the main advantages of working under an umbrella company is that they won’t need to concern themselves with IR35 as they will be paid via PAYE and have a contract of employment with their chosen umbrella company. As a result, you will be considered an employee, which means you won’t be considered for disguised employment.

Why Should You Choose an Umbrella Company?

By choosing a reputable umbrella company, you will benefit from umbrella employment designed for contractors and freelancers. This means that employees can benefit from peace of mind while also ensuring that they remain compliant and secure. They will help remove the painstaking administrative tasks while also allowing contractors to become an employee, which means that tax and pay are taken care of.

What Are the Benefits?

Registration is quick and easy, which is perfect for contractors looking for a rapid solution that fits their needs. It’s also possible to work out your take-home pay using an online calculator. Payments are made quickly and efficiently once received by the Umbrella company.

Furthermore, umbrella companies will provide a service guarantee. This means that you can benefit from their service and support as and when you need it. As a result, you will receive support and guidance regarding pay, tax, and all other elements of being an employee, including employee benefits. This means that you could benefit from the likes of reward schemes, pension schemes, contractor mortgages, and holiday pay, too, removing the restrictions that are often met by contractors.

Finally, it will be delivered in a way that feels personal because you will always have a point of contact who is there when you need them.

So, if you want to avoid the complexities of IR35 and want to find a solution that works, then using an umbrella company can ensure that everything is taken care of. Allowing you to focus on delivering a first-class service.

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