IR35 has undergone several changes since its original roll out in 2000
Conceived as a way to crack down on tax avoidance by low paid workers who wanted to avoid paying national insurance, IR35 has evolved into the foremost legislation with which HMRC generates additional tax revenue from higher earning contractors. In April 2020, they will adapt it once again to cover the private sector and thus affect more contractors than ever. Our comprehensive guide is here to cover the history of IR35, how it will change next year, and what this will mean for you and your business.
IR35 was first created in 2000 as part of the Finance Act and is also known as ‘intermediaries legislation.’ It was put in place to separate genuine contractors from ‘disguised employees’ who were essentially pretending to be self-employed in order to gain a tax advantage.
The reason these employees were disguising themselves as self-employed workers is that both they and their employer stood to benefit significantly from the tax rules around contractors using limited companies.
Although Ltd Companies were originally meant to be vehicles through which enterprising individuals could produce, buy or sell physical goods, contractors can also use them to sell their personal services. While this doesn’t generate a tax advantage, the benefits of owning a Ltd Company mean that you can pay yourself using a small salary and high dividends. Dividends are separate from PAYE (pay as you earn) calculations and even have their own tax-free allowance, meaning you can pay less tax overall.
With a wave of people leaving full time employment on a Friday and returning on the Monday in the same role but as a contractor with a Limited Company, the government recognized that they stood to lose significant tax revenues. As a result they quite reasonably took action to prevent this type of tax avoidance by introducing IR35.
However over time, the government started to widen the scope of IR35 to class normal contractors, those who were legitimately selling their services through Limited Companies, as “avoiding tax” too.
The issue with IR35 in turn became proving that you are a genuine contractor and keeping yourself out of “scope” for the legislation entirely.
IR35 compliance comes in two forms; “inside” and “outside”.
If you’re ‘outside IR35’ or ‘IR35 compliant’ it generally means that you are deemed to be a real contractor. You can use a Limited Company or more accurately benefit from the reduced tax rates that come with them.
If you’re ‘inside IR35’ then you’re effectively a disguised employee and while you may be self-employed, for tax purposes you must process your payroll as if you were an employee of your end client. In reality this means that if you operate a Limited Company you must process 95% of your income through PAYE and will not be able to use the dividend or expenses mechanisms to reduce your tax bill.
Factors that can determine if you’re inside/outside IR35 can include:
Obligation – Genuine self-employed workers can work project-by-project without any obligation to continue after a project ends. In this instance clients also are not obliged to provide any further work after this time. Employees on the other hand are expected to receive tasks from their single employer on an indefinite basis.
Control – Genuine contractors can dictate how they work, where they work and when they work. This is not the case for employees who are told the above by their employers their working hours and must agree in advance their holidays.
Hiring power and substitution – If you own a limited company, you have the ability to expand your business and hire other people. Additionally, those outside IR35 can state in their contracts that someone else can complete their work for them. Those inside IR35, or ‘disguised employees’ do not have this power.
Until 2017, it was the responsibility of the contractor to ensure they had the correct IR35 status and declare it to HMRC. However in April 2017 this rule changed for contractors working in the public sector.
The change meant that the responsibility for deciding a contractors IR35 status and paying the correct taxes shifted away from the contractor. It became the responsibility of the end client to prove that the contractor was genuinely self-employed. If they were found to be inside IR35, contractors would be taxed at the higher rate of employees and the end client would be liable if those taxes were paid incorrectly.
As a result, the majority of the public sector controversially blanket declared all contractors inside IR35 regardless of their true working situation. This created uproar in the contractor community with many losing take home funds as a result of loosing their tax advantage.
In essence while IR35 may have started as a legitimate curbing of false employees, the government now doesn’t agree with any contractors (legitimate or otherwise) paying less tax than regular employees.
Therefore the IR35 changes of 2017 will be replicated onto the private sector from April 6th 2020. The onus of responsibility to prove authenticity will be placed on private clients instead of the worker. It is widely expected that the majority of private sector clients will declare their contractors inside IR35 or stop using contractors altogether.
The changes depend on how you work now. If you are the owner of a limited company or are a sole trader in the public sector, then you should already know your IR35 status and pay the correct taxes (most likely inside IR35). You will be used to what is expected of you and your clients by HMRC and should make sure your contracts are IR35 compliant.
If you currently work in the private sector, then you will face the changes. You won’t have to prove that you are not a ‘disguised employee’ anymore, but instead as this will become the responsibility of your client will have your IR35 status dictated to you.
This alone is controversial because many end clients do not know if you work for one or more clients!
We envisage a world where being inside or outside IR35 becomes a selling point for agencies and end clients, with those offering outside IR35 contracts being able to attract the very best contractors.
Unfortunately if you’re unable to secure an outside IR35 contract, even if you use a Ltd Co now, you will have to change how you pay yourself so that you process 95% of your earning through PAYE.
If IR35 seems like another complication that you would rather avoid, you can always work through an umbrella company. Umbrella companies take away the issue as they treat you as one of their employees. This means that you can provide your services knowing you are covered, and the umbrella company will calculate and deduct your tax at source.
Umbrella Companies are also extremely competitive on fees, making using a Limited Company a time absorbing exercise in comparison for no financial benefit.
Not sure where to start with choosing an umbrella company? Umbrella Supermarket lets you compare them all, and you can get a quote in two minutes to help you get up and running in no time.
Any contractor considering switching to an umbrella company will want to know how to find the best provider to work with.
Although you could spend your precious time and energy searching the web for the best umbrella company, there is an easier way – using an umbrella calculator.
In this guide, Umbrella Supermarket explains why every contractor should use an umbrella calculator in 2021.
If you are considering contracting you will need to decide on PAYE or umbrella.
It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.
To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.
There are many reasons that contractors across the UK opt to work under an umbrella company.
Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.
For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.
Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.
In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.
If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.
After all, there are lots of umbrella companies out there, so how do you know which one to choose?
To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.
One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.
In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.
To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.
If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.
After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.
PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.
To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.
One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.
To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.
Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.
One way that contractors can work is through an umbrella company.
Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?
To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.
There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.
After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.
However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.
To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.
If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.
To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.
