What is IR35?
The murky pool of IR35 has given many a contractor a headache and landed a few with a hefty bill for unpaid tax. But what’s it all about?
In the 80s and 90s, there was a steady growth in freelancers operating via personal service companies (PSCs). However, by the late 90s a growing number of employees began leaving their job, setting up a limited company and returning immediately as a contractor to do exactly the same job, purely to dodge tax.
This scenario was often encouraged by employers as a way to avoid employment risk and their obligations as an employer. The market became very confused between genuine contractors and those only doing it to avoid tax.
IR35 is the Government legislation that was implemented to put a stop to this behaviour. It doesn’t outlaw PSCs or limited companies, or imply that they’re not legitimate ways to operate. What it does is apply a special tax calculation and liability on a PSC in certain circumstances, where a contractor’s skills are provided in a way deemed to be the same as employment.
IR35 is an issue if you operate through a limited (or personal service) company, as a sole trader or through a corporate partnership or a common law partnership. If you operate through an umbrella company, you are effectively an employee paying PAYE so IR35 is not a concern.
If you are deemed employed, you are inside IR35 and subject to higher tax.
If you are deemed self employed, you are outside IR35. Click here to have the distinction explained a bit more clearly.
So how do you maximise your take home pay?
Ideally, to maximise your take home pay, you want to be deemed outside IR35. However, this requires careful management and planning to ensure your services are provided on the right basis. This is where ClearSky come in, and where we really excel. Our IR35 review is designed to look for risk and manage that risk, where possible, in a sensible and clear cut manner.
If you determine yourself to be outside IR35 but, on close inspection, the Inland Revenue decides otherwise, you could be in for a substantial bill. HMRC are actively looking for and clamping down on non-compliance, so you need to make sure you’re whiter than white.
We have the experience and in-depth knowledge needed to make a thorough assessment of your personal circumstances and specific contract to determine your IR35 status and offer accurate advice. (Click here to see how we helped an IT contractor faced with a back-dated tax bill.)
If you’re inside IR35, it could still make financial sense to operate via your own company, but it might not be enough to make the additional responsibility worth the while. In which case, you might be better off with an umbrella company like our sister company Parasol. We can advise you of all the issues so you can make an informed decision.
Each time you change contract we’ll reassess your status and keep on top of any changes to legislation that may affect you. As things change, we can relook at the structure of your business to help you operate compliantly and as efficiently as possible.
Basically, with ClearSky, IR35 is not something you need to worry about. Phew.
