How does IR35 affect you?

office contractors , kettle mag
Written by Nigel Simpkins

The last thing you want to hear as a contractor is the dreaded, IR35 legislation, introduced by the government in 1999 to battle ‘disguised employment’. The only time you’ll be hearing this is when an accountant is warning you of it or you’ve somehow breached the legislation rules. Whether you do this knowingly or accidentally is besides the point, it can massively affect how you work as a contractor and can remove the benefits all together if you’re not careful.

Brookson take a look into how IR35 affects you, your finances and your future work contracts.

Why Was It Introduced?

IR35 was introduced to combat disguised employment, which is where a contractor would work for a client as a limited company but essentially be the same as any other employee at that company. Doing the same work, the same hours but for more pay and large reductions in tax and national insurance. As you can see this isn’t fair to the mast majority of people, so the government introduced IR35 to stamp it out.

Protecting workers rights from people attempting to bypass the law, it makes sure that anybody hired on to do contracting work needs a clear, defined role, and once it’s complete, so is the contract. 

What Happens If It Does Apply?

If IR35 does apply to you and your contracts then the legislation makes provision for paying that extra income tax and NICs. 

The amount you to pay can also increase drastically due to the fact that the government can go back 6 years through your contracts to see if they also apply. Meaning you may receive tax bills for up to six figures depending on the amount of work that IR35 applies to. 

The HMRC will do principal tests of employment to see whether IR35 applies to each of your contracts. These are:

  • Control: What control does the client have over what, how, when you complete the work at hand? A contractor has control over all of these and an employee does not. 
  • Substitution: Is it necessary for you to complete the work or can a substitute be sent in your place? As a contractor you have the power to send anybody you deem has the skills to complete the work. An employee must complete the work themselves and cannot send others. 
  • Mutuality of Obligation: This is when an employer is obliged to offer work and you are obliged to accept that work. When contracting, neither the contractor or the employer needs to accept work or offer more. 

If you know that a contract you’ve worked on is caught by IR35, then you must pay out all of your limited company’s fees less legitimate expenses and pension contributions as a PAYE salary. That way you’re paying yourself like an employee, not a contractor, making IR35 not apply. 

Speak to a specialist contractor accountant today if you’re worried about IR35 and they can help you go through your past and current contracts. It’s important to be prepared so that you’re not left in a bad situation if IR35 comes along and lands you with heavy tax increases.