IR35 legislation applies to ‘contractors’ who supply their services to an ‘engager’ via an ‘intermediary’ (eg, a limited company) IF the contractor would have been be an ‘employee’ other than for the interposition of that intermediary,.
Deciding whether or not a contractor ‘would have been an employee’ can be difficult. For example:
An electrician provides his services via a limited company.
If he uses his own van, tools and equipment, works for lots of different clients, gets paid a fixed sum for the job, and plans and controls his own work, he is very unlikely to be caught by IR35
If he works for just one builder, uses the builder’s van, tools and equipment, gets paid by the hour, and the work he does is controlled by the builder he very probably will be caught by IR35
But what happens if he contracts to (say) 4 different builders, uses his own tools and equipment, but gets paid by the hour by each builder, and one or more of builders is pretty hands on in planning and supervising his work?
Whether a contractor is ‘inside’ or ‘outside’ IR35 is important because:
A contractor who is ‘outside IR35’ remains in charge how profits are distributed – for example, by deciding if and when a salary or divided is paid (and therefore taxed), AND choosing to whom the salary or dividend is paid.
A contractor’s work which is ‘inside IR35’ is taxed under rules similar to the way PAYE is applied to an employee (whilst the ‘deemed employee’ receives none of the protection or benefits given to real employees, such as pension entitlement, security of contract, paid holidays etc)
Those contractors who are outside of IR35 will usually pay less tax than those inside IR35.
Until now it has been the contractor (usually with help from their accountants) who kame the decision as to whether or not IR35 applies. However, from April 2020 new legislation comes into force which means its is the engager who decides and , unfortunately, there is a worry that many engagers will take the easy option and decide that almost all contractors are ‘inside IR35’, because the tax impact for them is minimal and they will find it earlier to err on the side of caution.
If that is the case many contractors currently working through their own limited companies will find that their tax bills rise substantially.
Contact David Sutton on 015394 32540 for advice on what action you need to take to minimise the impact of the new rules.