IR35 is a term that has been used in the world of taxation and employment in the UK for some time, but few people have a clear understanding of what it means. We’ve put together a comprehensive guide to IR35 so whether you are a self-employed contractor, a hiring business or someone looking for a better understanding of tax law, we can help.
What is IR35?
IR35 is a tax legislation introduced by the UK government in 2000 to tackle what is often referred to as ‘disguised employment.’ It was designed to ensure that individuals who work like employees but operate through their own limited companies (often called personal service companies or PSCs) pay the appropriate taxes.
Prior to its introduction, many individuals were exploiting a tax loophole by working as self-employed contractors through PSCs to reduce their tax liabilities. This practice led to the loss of significant tax revenue for the government. IR35 aimed to put an end to this by determining whether individuals were genuinely self-employed or, in essence, ‘inside’ the tax system as employees.
How does IR35 work?
IR35 uses a set of criteria to evaluate an individual’s employment status, such as control, supervision, and mutuality of obligation. If the working relationship between a contractor and a client resembles that of an employee-employer relationship, the contractor is considered ‘inside’ IR35, and the client must deduct income tax and National Insurance Contributions (NICs) from the contractor’s earnings.
Changes to IR35 in 2021
The implementation of IR35 has undergone significant changes. In April 2021, the responsibility for determining IR35 status shifted from the contractor to the client in the private sector (previously, this was the case only in the public sector). This change aimed to reduce non-compliance by encouraging businesses to correctly assess their contractors’ employment status.
IR35 is a critical piece of legislation in the UK, impacting both contractors and businesses. It aims to ensure fair taxation and prevent tax evasion in the gig economy. However, its implementation has raised concerns and challenges, which continue to be debated. Staying informed and seeking professional advice is crucial for individuals and businesses navigating the complexities of IR35 to ensure compliance and avoid legal issues.
This is where Bishop Oak can help as we provide fully compliant outsourced payroll services for businesses across the UK. Contact us to find out how we can support your business.
