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IR35 - overview of the IR35 tax rules

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IR35 first reared its head via an Inland Revenue press release in 1999 entitled: ‘IR35: Countering Avoidance in the Provision of Personal Services”.

“The purpose of the new rules is to remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions (NICs) by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.”

IR35 became law via Schedule 12 of the Finance Act 2000 – its prime aim was to ensure individuals working via limited companies would be subject to the same taxation laws as an individual performing the same task under standard PAYE conditions.

The IR35 rules were invented primarily to stop freelancers (particularly IT contractors) from drawing income in the form of a small salary and large dividends from their limited companies, where ordinarily they would be paid a standard salary for performing the same role if they were not working via their own limited company.

In determining whether a person’s employment is deemed to be subject to the IR35 rules or not, the Inland Revenue would need to work out if that person is ‘employed’ or ‘self employed’ according to the IR35 rules.

A person who worked 9-5 on a client site, had little or no direct responsibility and provided no tools of his own to complete a task would most likely be deemed as ‘employed’ and therefore subject to the IR35 rules. However, a contractor who worked from home, performed tasks for multiple clients and used his own equipment to complete the work would more likely be deemed ‘self employed’ under the rules. The Revenue would look at the overall picture to determine a person’s employment status, so the more pointers there are to genuine ‘self employment’ the better.

The Inland Revenue leaflet - http://www.inlandrevenue.gov.uk/pdfs/ir56.pdf, 'Employed or Self Employed’ has been provided to help people work out if they will be liable to IR35 or not.

If a person is caught by the IR35 rules, they will receive most of their income in the form of a ‘deemed payment’ together with a miserly ‘5% allowance’ to cover intermediary expenses. They will also be able to claim other expenses on top of the 5% allowance, such as insurance cover and pension contributions.

Since the IR35 legislation came on the scene, many IR35 cases have been disputed, and on the whole the Revenue has found it hard to uphold the new laws.

There is a dramatic difference in taxation levels between those caught by IR35 and those not, so if you believe you may be ‘employed’ as per the IR35 rules, you should firstly consult one of the key IR35 resource sites, such as Contract Eye (which was founded by the Bytestart team) and if necessary consult professional advisors who will be able to help.




Latest articles in IR35
 
IR35 raises pitiful £1.5m per year for Treasury
The leading freelancers' association has revealed that the Treasury makes a mere £1.5m via the controversial IR35 rules, falling well short of the £220m it expected to raise in National Insurance contributions alone before the rules became law. [May 21, 2009]
 
Calls to abolish IR35 tax rules in Budget 2009
Following the recent Early Day Motion calling for IR35 to be repealed, a leading freelance organisation has called for the controversial tax to be abolished during Budget 2009. But one expert suggests caution in that it could be replaced by something even worse! [April 9, 2009]
 
Early Day Motion calls for IR35 to be abolished
A recent Early Day Motion calls on the Treasury to remove barriers to enterprise in the UK, including the abolition of the controversial IR35 legislation. [March 23, 2009]
 
Ten years on and IR35 tax still 'damaging the economy'
It is ten years to the day since the term 'IR35' - the notorious tax legislation - was first mentioned, via an HMRC press release. A leading business representative group explains why IR35 is damaging to the economy, and why the government should abolish it. [March 9, 2009]
 
Freelancers and contractors urged to take sound IR35 advice
Following the publication of its new tax guide, a leading freelancers' group has urged its members to take good advice on the IR35 legislation, or face the possibility of a large tax bill. [December 22, 2008]
 
Dragonfly IR35 case - contractors should take notice of landmark ruling
In a landmark court ruling last week, the director of Dragonfly Consultancy Ltd lost his IR35 appeal in the High Court. The judgement shows, once again, how important it is for self employed people to be aware of the IR35 rules and to take professional tax advice. [September 9, 2008]
 
Are you employed or self employed? - HMRC releases new guidance
HMRC has published an updated employment status leaflet which aims to help people decide if they are "employed" or "self employed" - as this will determine how much tax and NI contributions they pay. [June 23, 2008]
 
IR35 - are you employed or self-employed?
Some high level pointers to whether you are deemed to be "employed" or "self employed" according to the IR35 tax rules [November 1, 2007]
 
IR35 - overview of the IR35 tax rules
IR35 tax overview which may impact small business owners and IT contractors, particularly 'one man bands' working on client sites. [September 12, 2007]
 
Financial impact of IR35 on IT contractors
The difference in the tax treatment of contractors whose work falls inside and outside the IR35 rules. [February 28, 2006]
 
IR35 - Inland Revenue Documentation & Advice
A listing of all the key Inland Revenue IR35-related documents, including IR35 FAQ's and where to find help if you are concerned about the effect IR35 may have on your small business. [February 18, 2006]
 
Contractor group calls for answers over IR35 probes
The Professional Contractors Group is pressing the Government for details of the cost and efficiency of IR35 investigations after figures revealed a "success" rate of less than 1 per cent for HMRC. [November 16, 2005]
 
IR35 - FSB calls for business tax overhaul
A commitment to overhaul the tax system for small businesses, including the abolition of IR35, should be a priority for politicians in the run-up to the next election, according to the FSB. [February 15, 2005]
 
IR35 - Tory plans to slash small business taxes
Taxes on small businesses, including IR35, could be cut by more than £500 million a year under proposals being published today by the Tories, according to a report in The Telegraph [January 3, 2005]
 
Tax Bodies say IR35 legislation is 'fundamentally flawed'
A discussion paper released by the Chartered Institute of Taxation and Tax Faculty states that the IR35 rules are 'fundamentally flawed' and that the IR35 legislation should be replaced with a much clearer system for determining employment status. [September 3, 2004]
 
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