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tax icons 3334326 1280 - An Ultimate Guide to IR35 (The off-payroll working regulations) Tax Legislation in the UK

An Ultimate Guide to IR35 (The off-payroll working regulations) Tax Legislation in the UK

IR35 denotes the United Kingdom’s legislative enforcement against tax evasion. It has been designed to tax hidden employment at a rate similar to standard salaried persons. In this perspective, “disguised employees” are those workers who get payments from a client via an agency. If the client directly paid the worker, then the beneficiary could become the client’s usual employee and thus fall into the standard taxation rules of HMRC.

Before the off payroll working regulations (IR35) enforcement, contractors would set up their own limited company to accept payments from clients. Now, the company owner could use the revenue earned this way, as would any small businesses. The owner could distribute profits from the company as dividends. Such payments are not subject to National Insurance. Such small company owners could also save tax by splitting the ownership with family members. Today, professional tax advisors will not suggest share allocation to family members in the company unless they undertake a significant business role except simple accounting tasks.

Many self-employed individuals in the UK are not ready for such a taxation change; GoRings Accountants firm is always active about the upcoming updates to IR35 legislation. GoRings is also analyzing how this law will affect contractors. As contractor accountants, GoRings specializes in dealing with such legislation. GoRings know it’s essential that self-employed professionals organize for it the most delicate way they can – and get awareness about what happens if they’ve come within the tax rule, IR35.

An Overview of IR35 Legislation

IR35 was announced in April 2000 to resolve tax evasion issues connected to persons who use a transitional agency, like a limited company, to render their services, rather than doing it as a direct employee. It finally denotes that the professional evades paying employee income tax to HMRC. They also avoid paying any national insurance employee contributions. In a nutshell, IR35 is a regulation meant to stop people from hiding themselves as freelance contractors to pay fewer taxes. The following factors would suggest that the professional is an employee and not a contractor:

  • The individual is getting regular and fixed payments from a client
  • They do not risk any financial breakdown on their end
  • They are unable to work for other businesses as already committed to one client

HMRC says that many working individuals are not categorizing themselves as they should when they are paying taxes. It is leading to financial damages for the UK government of around £1.2 billion a year. If a professional is within IR35 rules, they have to pay due tax and contributions to National Insurance.

You may prepare for this regulation by knowing more about IR35. You may discuss this with us. GoRings specialist consultant will help you with any questions or doubts you may have.

What Concerns does the UK Government have about Any Possible Reviews in the IR35 Rule

People may support the legislation but consider it not practical, as clients are already terminating contracts with such individuals due to IR35 non-compliance. However, the government started a review of this reform, which is set to be decided very soon, but there are no policies to terminate its enforcement. Many individuals thought that the new IR35 regulations would be deferred by a year, but it doesn’t look as such.

A different investigation into the new IR35 rules has been launched by the House of Lords’ finance bill sub-committee. It will try to determine how the reform will influence organizations and how professional’s tax status will be identified.

There is no second thought that most of the contractors welcome this inquiry. However, as the IR35 regulation implementation will start after 6 April 2021, many contractors also believe that the parallel inquiry should have been done much earlier.

How does The Rule May Apply to a Contractor

As per HMRC and UK government, an individual worker may come under these rules if they are:

  • A business client who accepts services from a worker through their intermediate agency
  • A contractor who delivers their services through their intermediary
  • An agency distributing any workers’ services through its intermediary

If the regulations apply, employee income tax and National Insurance employee contributions must be subtracted from service fees and sent to HMRC.

When does the Regulation Apply

The rules apply when a contractor provides their services to a business through an intermediary. However, the individual worker would be categorized as an employee if they were recruited directly by the client.

There is an agreement for the facilitation of the off-payroll service rules is a verbal, written or implied contract between either parties.

The IR35 rules apply on a case by case basis. A contractor professional may have some contractual job that falls within the IR35 rules, and some contracts do not.

  1. Before 6 April 2021:
    If you’re a contractor and the client business is a public sector, it is the client’s accountability to decide the contractor’s employment status. The client should inform you of their decision.
    If you’re a freelancer and the client operates in the private sector, it’s the intermediary agency’s duty to decide your employment standing for each agreement. The term private sector would include third sector establishments, such as some charities and NGOs.
  2. From 6 April 2021:
    From 6 April 2021, how the off-payroll service rules are applied will change.

All public sector establishments such as SMEs, MSMEs and big corporations will be duty-bound for deciding if the rules apply to them.
Suppose a contractor delivers services to a small business client operating in the private sector. In that case, the worker’s agency will be held responsible for determining the contractor’s employment status and if the IR35 rules apply.

How does IR35 Fits in Private Sector

The government considers that it is prejudicial that regular employees pay more tax than contractors or freelancers. Hence, the government came up with IR35 regulations in the public sector in 2017—at present, after 6 April 2021, the government is regularizing it to the private sector businesses.

The IR35 legislation for the public sector establishments was deferred until 2020 and will apply to agreements where the final client is a large or medium merchant. What the Companies House Act 2006, c.46, part fifteen, a ‘large or medium business’ is defined as:

“The eligible conditions are satisfied by an establishment in a year in which it meets two or more of the following required parameters–

  1. Company annual turnover (not exceeding £10.2m)
  2. Organization balance sheet total (not exceeding £5.1m)
  3. Company has number of employees (not exceeding 50s)”

Small businesses will be excluded from the private sector extension. But how to consider whether a business is a medium, large, or small company?

If, over 12 months, your business’ revenue is less than £10.2 million, the accounts ledger sheet total is not exceeding 5.1 million and employed less than 50 workers; then it is a small company.

What are the Apprehensions over The off-payroll working Regulations

As the employment category determination’s duty will be with the end-user client, some vested individuals fear that private segment businesses will take a careful method, and they will offer only PAYE roles.

There is also a possibility that many establishments in the private segment which employ freelance contractors are not aware of the new IR35 legislation. Additionally, less than 50% of large and medium merchants have initiated the preparation for what’s coming after 5 April 2021. Many new employers are also worried that they will eventually miss out on skilled individuals who work as contractors.

Hence, employers must look for professional advice and assistance to ensure their freelance contractors are not falling within this legislation. Also, ensure to examine any new self-employed contracting individuals before hiring them.

GoRings Accountants firm provides accounting for contractors in the UK. Therefore, when you opt for the expert services from GoRings, you can be at peace of mind while seasoned accountants and tax specialists working for you.

How GoRings Accountants Can Help with Your IR35 Legislation Compliance Requirements

Starting 6 April 2021, it will be essential than ever to make well-informed decisions on how you operate the business. Contracting professionals or final service receiving establishments may consult specialist accountant from GoRings. GoRings Accountants firm is a veteran in the taxation regime and can help you in assessing your options. GoRings will offer a profound vision of the coming HMRC tax changes.

To get more insight on the 2021 IR35 legislation enforcement, you can quickly get in touch with the GoRings Accountants adviser for IR35 off-payroll working rules for freelancers, contractors, and consultants in the UK.

GoRings accountants firm is an experienced limited company accountant service provider in the UK. Our team of subject matter experts always stay updated on any legislation that will influence contractors, self-employed individuals, or individual offering services through their firm. Therefore, when you have more questions about GoRings services, please call us on 020 7886 9533 or write an email to contact@goringsaccountants.co.uk.

Who is GoRings Accountants

GoRings Accountants is an advanced new-age technology-driven accountancy, finance and taxation service provider in the UK. For busy contractors, freelancers, GoRings offers you simple and tailored service to put you in control over your business ledgers.

GoRings works across versatile industries such as health care professionals, transport workers, IT, finance, architecture, engineering, restaurants, and landlords. You will also empower your business with cloud-based accounting tools such as Sage, Xero, Quickbooks, and FreeAgent by recruiting us.