IR35 – The ‘Contractor Tax’ Demystified
Contractors and freelancers who choose not to be full-time employees and work flexibly for many clients have focused tax legislation IR35. The IR35 tax law is designed to tax taxes as if they were “disguised employees”, providing their qualified and mainly informed services to clients through their own limited company. IR35 can make these workers lose up to 25% of their normal wages at home with additional taxes.
Unfortunately, IR35 is poorly thought out, and tax courts and subsequent court cases have complicated the things that professional consultants pay reasonable contractors for not having been caught by the IR35.
His Majesty’s Revenue and Customs (HMRC) investigate the IR35 annually in many contractor tax cases and can investigate tax returns and contractor workers for up to six years in arrears. And many contractors go to IR35 tax courts or court cases because they question the need to pay an additional tax.
When deciding whether a contractor is within IR35 and, therefore, must pay an additional tax, HMRC inspectors and then the tax courts and tribunals consider three key areas:
– a written contract between the contractor and the agency and the final user customer;
– Business of the contractor as a whole.
– The real work relationship between the contractor and his client.
Tax inspectors want to prove that the contractor is really an “employee in disguise”, and if the contractor did not have an intermediary such as his limited liability company between them and the client, he would be a regular employee and taxed as such. This is why the IR35 is also called “Intermediary Legislation”.
HMRC uses key “employment tests” to verify if the contractor is a disguised employee, which includes:
– if the contractor controls or tells how to work, his end-user customer
– The ability of the contractor to use a substitute contract – Reciprocity of commitment or “MOO” –
– when the employer is obliged to provide work, and the employee is obliged to do so
As a general rule, if the contractor does not perform one of these tests, the court or the court will find that they are outside of the It Contractor Ir35 and, therefore, no additional tax is required as an employee. Unfortunately, work tests are rarely simple. Therefore, contractors may be exposed to long periods of stress during an IR35 investigation and still question IR35 legislation due to technical problems.
There are easy steps that contractors must follow to reduce the likelihood of finding them in the IR35, for example, invest in a tax investigation insurance for an expert to verify the contracts and have the clients confirm the contractor’s working conditions.
The contracting organizations have been trying to repeal the IR35 for many years, but it is likely that the legislation, or something very similar to the IR35, will remain in the books with statues in the immediate future. Therefore, contractors should always make sure that they handle their contractual careers so that they never fall into IR35.