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What is IR35?

IR 35 comes from the 6th April 2000 Intermediaries legislation. It was first proposed in the 1999 Budget press release numbered IR35. Hence now commonly referred to as 'IR35'. The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries.
Prior to the legislation, a worker could take the money out of the intermediary in the form of dividends instead of salary. The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary, the worker pays tax and NICs on a fair basis.
Who does it affect?

The legislation itself is not targeted at any particular occupation or business sector. It applies in any business sector. The rules will apply to you if you answer 'yes' to both the following questions. Would you be an employee if you worked for your client directly and not through your company or partnership? Does the company or partnership you work through meet certain conditions regarding ownership of the company?
What are the consequences of ignoring IR35?

HMRC monitors compliance with the legislation to ensure that taxpayers do meet their obligations to pay the correct tax and NICs. Where HMRC find that the incorrect classification has been applied, they have a duty to ensure things are put right for the past and, where appropriate, for the future. Interest and penalties may be charged on any additional tax/NICs due to a result of any review or enquiry.
Those that can be held liable are: The worker The Intermediary The Composite/MSC And sometimes even the Agency

HMRC have additional powers to claim lost Tax and NI revenue off ANY party who materially benefit from the placement of workers under the "transfer of debt" legislation.
How can you work safe?

You will need to ensure you do not use a Managed Service Company and in no way take dividends. Investigate and opt for a HMRC fully approved, tax efficient solution When choosing your solution make sure the following applies: You are fully employed. You do not receive pay in "dividends" The company operates a normal PAYE scheme You pay employed (Class 1) NICs The company continue to operate in an HMRC-compliant manner.
For a qualified solution, contractors will receive all the usual employment rights and protection given to individuals working for an employer. The service should offer both security and compliancy to all - workers, clients and agencies alike. The company you choose should ensure each and every contractor pays the correct level of Tax and NICs.

References;
HMRC Website
www.hmrc.gov.uk/ir35/
Wikipedia

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Uploaded: July 18, 2008 at 1:07 pm
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