What is IR35 Income?
IR35 income is income from a self-employed person that isn’t taxed as income. It’s also referred to as ‘deemed employment income’.
It’s a complex issue and if you have any doubts about your status, it’s important to seek a specialist ir35 accountant . However, the government has produced a handy tool called CEST that can help you to determine your IR35 status.
What is IR35?
IR35 is the tax legislation that was introduced to prevent people from avoiding taxes by offering their services through an intermediary. Those who are deemed to be inside IR35 pay more in tax and national insurance than someone who works as an employee.
The UK’s IR35 legislation is contained in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003. It is designed to tax so-called “disguised employment” at a rate similar to employment.
If a person is deemed to be inside IR35, the hirer, agency or other third party who pays them then has to deduct tax and national insurance from their payment cheque each month. Then they must report this to HM Revenue and Customs.
This is a major concern for many businesses who employ contractors on a regular basis. It’s important to review your contracts and working practices to ensure that you are not liable to this tax. It’s also a good idea to get specialist legal advice on your IR35 status, as it can be complex and confusing.
Who is responsible for determining IR35 status?
From April 6th 2021, all public authorities and medium- and large-size private sector clients will be responsible for determining the employment status of any contractor they engage. They will need to ensure that workers who supply their services through a personal service company (PSC), but who would otherwise be an employee, pay broadly the same Income Tax and National Insurance Contributions as employees.
This means that it is important for contractors to make sure they take a proper look at their contracts before they accept any new work. If they see that their clients will be assessing them ‘inside’ IR35, they might not accept the contract.
It is also worth ensuring that they maintain their own control and supervision over how, when, and where they provide their services. This should include ensuring that they have the ability to substitute themselves or instruct help from other people, if needed.
How do I determine IR35 status?
IR35 is a complex area of employment and tax law, which is why it’s important to seek expert advice. Whether you work as an umbrella worker or through your own limited company, it’s always best to have the right information to hand.
The first step in determining your status is to review each contract you are working on for IR35 purposes. This includes assessing the written terms of your contract, as well as your working practices.
Determining your status is not something to be taken lightly, as it can have a huge impact on your overall earning potential and future employment rights.
The key to deciding if you are inside IR35 or outside it depends on your ability to meet the three key tests: Control, Mutuality of Obligation (MOO) and Right of Substitution. A good starting point is to carry out a manual review of your contract and working practices.
What happens if I am deemed to be inside IR35?
IR35 is designed to ensure that all contractors pay the same amount of tax and National Insurance contributions as employees. However, the way in which IR35 applies can vary from one job to another.
If you are deemed to be inside IR35, you will have to pay a ‘deemed payment’ of income tax at the end of each tax year in order to account for any tax deductions or NIC that an employee would have paid.
The fee payer (the company that pays you a salary) will be required to deduct these monies and pay them over to HMRC in the same way as if they had employed you.
Should you be deemed to be inside IR35 and not have been paying the correct taxes, HMRC will raise a determination on you that will include the income tax, NICs, interest and any penalties that should have been paid during the accounting period. This can run into the tens of thousands of pounds.