A brief guide on IR35

Monday February 10, 2020

What is IR35?

If you are a limited company contractor, or sub-contract worker registered as a limited company to work on your projects, you may have heard  talk about IR35 recently.

IR35 looks at individuals working through their own limited company for a client. If that individual works in a similar way to how an employee would, IR35 will apply and the client will need to change the way that you are paid, meaning you are likely to see an increase in tax and NIC. 

Up until now, it has always been the individual who must decide whether they work like an employee. From April 2020, if the work is for a medium or large client, it will be the client who decides whether IR35 applies.

A medium or large client is a company who ticks 2 of the following 3 criteria;

•    Turnover more than £10.2m
•    Balance sheet total of more than £5.1m
•    50 employees or more

If the result of an IR35 decision is that the individual is “working like an employee” then they will either need be paid through PAYE (as employees are) or have to sign on to work through an Umbrella company.

What IR35 means for individuals

Both options will result in your take home pay being reduced.

Tax and National Insurance will be taken at source by the employer under PAYE (as happens with employees) or, where an umbrella company is introduced, the take home pay will go down even further as employer’s national insurance, pensions, holiday pay as well as the umbrella companies own fees will need to be accounted for.

Best practice would be to ask for the details of your take home pay and deductions from the company you are working for, whether this is through PAYE or an umbrella company. There are also some online tools available such as; https://listentotaxman.com/ that may help you to understand the implications of IR35.Individuals have a right to appeal against a decision that IR35 applies and end clients should give IR35 the attention it deserves. 

When new legislation like this is introduced there will always be some knee jerk reactions before it settles down but that is a long time to wait when it is affecting your pay.

If you are regularly working for a number of different clients, it may be that you will have a variety of ways in which you could be paid, for example some via PAYE and some for which you can still invoice as a limited company.

What IR35 means for employers

Pushing to move sub-contractors onto PAYE as a reaction to the legislation may see employers suffering a long-term impact where individuals who wish to remain working as independent limited companies look elsewhere for contracts, leading to a skills shortage.

A more effective approach will be to not simply blanket ban individuals working though companies but instead take the time to review how they work and consider this area in more detail.

RIFT Legal Services are IR35 experts and can assess the ways in which individuals work, providing an independent Status Determination Statement which can be used as evidence over the IR35 position or to challenge a decision already made by the client.

Contact RIFT Legal Services: 01908 516016 or visit https://www.riftlegalservices.co.uk/

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