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Understand IR35, or get ready to write a large cheque to HMRC

by Kobus Van den Bergh | Jun 08, 2017
  • If you’re a contractor in the UK, or you’ve thought about becoming a contractor, you’ve probably heard of IR35. Spoken about with equal parts fear and confusion, IR35 is legislation that aims to ensure that contractors in the UK are, in fact, contractors and not employees. What happens if you fall under IR35 as a contractor? Nothing good. Read on to find out what will happen and how you can protect your earnings from high taxes.
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    Why you need to be aware of IR35

    Contractors are hired by businesses in the UK to complete specific jobs with definable ends. If a contract between a company and a contractor appears to set up an ongoing relationship, that contract may well fall under the scope of IR35.  This means that the party performing the work set out in the contract will be subject to more onerous tax.

    Here’s the bad news: If IR35 applies to your contract, you could lose up to 25% of your earnings. This is a massive chunk of your hard-earned money, so it’s vitally important that you try to ensure that any contracts you enter into with public or private employers do not fall foul of IR35.

    Unfortunately, HMRC’s guidelines around IR35 are rather difficult to understand for the average contractor on the street. There is an online tool on their website that can help you determine whether you are within IR35, but its usefulness is questionable.

    A study in the UK found that the calculator labelled more than 7 of the 21 contracts that gave rise to the most important IR35 court cases incorrectly. These are not the kind of odds you want to be pinning your financial future on.

    Getting expert advice on your status is therefore a must. We recommend getting some degree of certainty about your IR35 status. You can send us an email and we’ll help you get sorted.

    Knowing why IR35 is important is one thing, but where did this legislation come from? And who does it apply to? Let’s investigate.

    It was 1999 and Gordon Brown was still in town

    In 1999 Gordon Brown, the then Chancellor of the Exchequer, wanted to bump up HMRC’s collection revenue. The idea was to find contractors engaging in what is called “disguised employment”. HMRC began looking for contractors who were not conducting themselves as contractors, but rather as employees.

    Since then, the government has shown little signs of cooling the requirements for IR35. It seems as though the legislation is here to stay, something which was confirmed by Philip Hammond in the November 2016 Autumn Statement.

    In that statement, the Chancellor decreed that public bodies that hired contractors will need to enforce IR35 from April 2017. This means that the onus is now no longer on HMRC, and fines and penalties for not paying the correct tax may be levied if employers and contractors do not take the necessary steps to ensure IR35 does not apply to a given contract.

    It has been suggested that a similar provision could come into force for the private sector. This would make it the responsibility of the employer to ensure that any contractor they engage with is paying the right tax.

    It’s confusing out there, so don’t be shy to ask for help

    From malfunctioning IR35 online tests to HMRC wrongfully telling self-employed contractors that IR35 rules don’t apply to them, it’s difficult to know where to start with IR35 these days. That’s where expert advice comes in handy.

    We’ve got over 20 years’ experience helping contractors get started in the UK. Give us a call on the details below and we’ll help point you in the right direction.

    Phone us on +44 (0) 20 7759 7553 or send our contracting team an email on today.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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