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The complexities of IR35 and what they could mean for you

IR35 came about as a means of increasing taxes for independent contractors, consultants and freelancers who used limited companies as a vehicle to invoice their clients.

This was favourable to them from a tax perspective as it reduced their tax bill. Often people added their partners as directors of the business so this could be a welcome tax double whammy benefit. PAYE will always, under the current tax regulations, incur more tax than dividends from a limited company because of employer’s national Insurance, employee’s national Insurance and tax.

HMRC believed that this was a loophole that was tantamount to disguised employment and IR35 came about as a tax law to treat fees paid to a limited company in the same way that they would a salary. This has left freelancers and consultants who genuinely provide services to a whole range of clients at risk of investigation by HMRC with all of the ensuing cost and anxieties. As there is a distinct lack of clarity and consistency in its implementation, taking the time to check with your accountant that you are not running the risk of falling foul of IR35 has to be a top priority for any consultant. The red light would seem to be if HMRC suspect that the relationship between the consultant and the client is in fact an employer / employee relationship that means fees should have National Insurance and tax deducted at source through PAYE.

Matters are even more complex for those who work in the Public Sector as new IR35 rules that were introduced in April 2017 make the client, that is to say the public sector end client, responsible for determining whether a worker who operates through a personal service company or other intermediary is covered by IR35 or is genuinely self-employed.

Without doubt, employment and the way people’s careers are changing means that the Gig Economy is here to stay and probably here to grow. Flexibility and choice are now important factors for those who eschew the traditional career path. Consultants, contractors and freelancers contribute billions to the economy and the focus on how they pay tax and how they structure their companies is likely to remain under scrutiny. The Chancellor of the Exchequer’s attempt to hit 2.5 million self-employed people with an unexpected tax hike through national Insurance backfired in a spectacular manner but the message is clear - politicians and HMRC are eyeing up the potential financial gains they could make from this huge community of flexible workers and we all need to stay alert.

Take the time to understand IR35, seek professional advice and make sure that you are not at risk. in June 2017 Lorence Nye from IPSE gave a comprehensive overview of IR35 and the slides can be found here.

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