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The main questions you need answered are; what is IR35 and how does it effect you? Well, you can find all the answers below.
IR35 is a piece of government legislation designed to put an end to Tax and National Insurance Contributions (NICs) avoidance by using intermediaries such as service companies (Limited or Personal) or partnerships. In a nutshell, IR35 affects all contractors who do not meet HMRC’s definition of 'self employment'.
Previously, companies could be set up to provide workers to client organisations. This enabled the client to make payments to the company without deducting PAYE or NICs. The worker was then paid in the form of dividends, rather than a salary, thereby saving on NICs.
On 9th March 1999, the Inland Revenue issued a bulletin, IR35, which detailed how they intended closing the loophole that allowed contractors to avoid paying significant amounts of tax and NICs by using personal service companies, composite companies or business partnerships.
The government saw all UK contractors as being potential 'tax avoiders', due to the tax saving benefits they enjoyed by operating as Limited and Personal Service Companies, whilst their underlying status was clearly that of a “deemed employee”. IR35 was formally introduced in April 2000.
By introducing IR35, HM Revenue & Customs have clearly defined what a personal service company is. They have also ensured that any other entities employing the services of individuals, who work as disguised employees, are still caught by the legislation.
Are you confident your current payment solution can stand the test of a HMRC investigation?
If you pay yourself as self-employed, (whether as a Limited Company or a Partnership), and/or use a dividend method of payment without proving you can do so legally; you can be fined by HM Revenue & Customs. Initially for the cost of the investigation and subsequently for all the tax and NIC you have underpaid. As you can imagine, depending on your level of income, this could easily run into thousands of pounds. What’s more, an IR35 investigation by HMRC often results in further scrutiny of your past tax payments, going back for up to six years.
Don’t forget, Crystal Umbrella use PAYE tax methodologies to process all income, so this piece of legislation does not effect any contractor who uses us as their payment solution. You can therefore sleep soundly at night, confident that you have nothing to fear from HMRC.