IR35 is a UK tax rule that applies to contractors and freelancers and helps ensure that people with certain employment statuses are taxed fairly. The rules set out under IR35 have come under heavy criticism and is set for reform under the Conservative Party.
The criticism of IR35 has mainly revolved around the need for contractors to prove their employment status. Contractors have to do this to stay within IR35 rules. Failure to do so could result in a fine.
In the proposed reforms to IR35 tax rules self employed people would have the opportunity to opt out of employment. This would in effect lose them their entitlement to employee rights such as holidays, annual leave, job seekers allowance, statutory redundancy payments and much more. The new scheme would be much more flexible although full details are yet to be set out.
The proposed changes are likely to generate significant interest as their one point four million freelancers and contractors in the UK. It might also help bring clarity to the sector as there is a common misconception that contractors are trying to cheat the tax system.
The current labour government has made no new announcements in relation to making changes to the IR35 tax rule. The government has been heavily criticised for it.
Background of the IR35 Tax Rule
IR35 tax rules fall under the Finance Act of 2000 and was introduced to prevent freelancers and contractors from taking small salaries and large dividends from their limited companies. This approach can provide significant tax benefits for an individual.
HRMC are responsible for assessing the employment status of a worker. Their status will determine whether they fall under the IR35 umbrella. Although HRMC make this decision it is up to the individual to ensure that the tax is paid.
Individuals who work from home or own a business property often fall under the IR35 tax rule. This is because these contractors are considered to be self employed. Individuals who perform services for a business owned by another person are likely to fall under the ruling also. The rulings are often fairly technical and the IR35 legislation is notoriously difficult to enforce.
In some cases IR35 tax rules apply to contracts rather than individuals. In some instances a contractor will be running several contracts and not all will fall under IR35. The individual must understand which ones fall under IR35 and pay taxes accordingly. This can cause confusion.
IR35 is an extremely technical area and can leave people confused. One option that people have is to use an umbrella company when contracting. These companies will take care of taxes and payments for you so that you can concentrate on what you do best. Most umbrella companies also offer the benefits that an employee would receive.
It will be a while before we see changes introduced to the IR35 tax rules however many believe these changes are needed. The reforms should bring significant benefits to contractors and change people's perceptions.