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IR35 is a new law that allows HMRC to collect additional taxes if they consider that a contractor could be, in fact, a ‘disguised employee.’ 

The purpose of IR35 is basically to make companies pay the right amount of Income Tax and National Insurance. The reason they can pay the wrong amount is that the NI that self-employed contractors pay is lower than the rate employees pay.

Why does IR35 exist?

Many contractors who work through a limited company benefit from tax efficiency. Although they don’t usually get employee perks such as holidays and sick pay, they have a lot of flexibility and control over aspects of their jobs.

Contractors and their clients sometimes try to take advantage of this tax efficiency . They do this by pretending to be self-employed when, in reality, they are practically employees of that company. For the client, they can evade making NI contributions, holiday pay, sickness pay and pensions. The two main benefits for most contractors are:

  • They’re paid like a freelancer
  • They benefit from the structure and relative security of being a permanent worker

IR35 was introduced by HMRC with the aim of preventing this tax and benefit avoidance.

Who does it apply to?

If you’re working through a limited company and providing services, you’ll almost certainly need to think about IR35.

If you’re unsure whether this applies to you in the eyes of HMRC, ask yourself:

  • Do you have to do the work personally, or can they send someone else instead?
  • Do you have to carry out any task that an employee would normally do (like managing other employees)?
  • Does your client get to decide how, when, and where you do the work?

If the answer is ‘yes’ to any of these, you might just be a disguised employee – at least according to HMRC. They might make your client place you into their payroll and will tax them Income Tax and NI at employee rates.

Since 6 April 2021, all public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply.

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