What is IR35?
In short, it's the name given to tax legislation that is aimed at identifying individuals who are avoiding paying the tax that they should be. The governmnet are driving contractors in all sectors to be "employed" under PAYE (Pay As You Earn).
The IR35 legislation specifically challenges those people who supply their services to clients as "self-employed" via their own company, often known as a ‘personal service company’, or PSC, or a limited liability partnership.
The HMRC who class these individuals as ‘disguised employees’. This means that the HMRC do not recognise the contractor in question as ‘self-employed’ from a taxation perspective. They believe therefore that they should be taxed the same way that a general employee should be, thus falling under what is called IR35.
"There can be significant consequences of ignoring the IR35 legislation. Interest and penalties may be charged on any late payment of tax and NICs due or as a result of an HMRC enquiry into your situation." HMRC
If you’re engaged by a client through your own intermediary, it’s the client’s responsibility to consider your employment status and make sure they meet their own tax and National Insurance liabilities.
If all of the following apply then you need to follow IR35 legislation:
- you work for a client as a self-employed contractor, sole trader, freelancer, or consultant.
- you pay yourself through your own limited company or partnership (sometimes called an ‘intermediary’ or ‘personal service company’) or you have a material interest in that company.
There are some circumstances where the client may be responsible for operating your PAYE, such as if:
- the contract or working arrangement shows that you’re engaged directly by the client as an office-holder or employee, then the client will be responsible for operating PAYE for you.
- a client contracts directly with you - the client will always be responsible for operating PAYE for you, even if payment for your services is made to your intermediary.
There may be penalties if the client doesn’t operate PAYE where needed.
Want to find out more? Call our friendly team on 03330 143 136 to find out more about our compliant PAYE solutions.