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IR35 – How Does It Affect Contractors?

What is IR35?

IR35 has been around since April 2000 and is a set of rules that affect your Tax and National Insurance if you (The Contractor) are contracted to work for a client through an intermediary. This most commonly will be your own limited company but can also be a partnership, service/personal service company or often a recruitment agency for Public Sector workers.

If IR35 is deemed to apply, then the intermediary has to operate PAYE and National Insurance contributions on any salary or wages it pays to The Contractor during the tax year.

IR35 can also apply if you work in the construction industry and if it applies to you, special rules are adopted to ensure tax is deducted correctly under the CIS and IR35 schemes.

What is changing – IR35 and the Public Sector?

From 6th April 2017 the responsibility for determining IR35 status in Public Sector engagements will shift from the contractor to the party paying them, which will be either the end client Contractors work for or the recruitment agency used.

The above point in bold is important as it means under the new rules the end client or recruitment agency will be liable for any unpaid taxes where HMRC challenge the IR35 status of a contract operating outside IR35 and find the contract to be inside IR35.

Where the end client or recruitment agency decides a Contractor will be working inside IR35, the end client or recruitment agency will have to deduct Income Tax and National Insurance contributions before paying the Contractor’s fees (i.e. PAYE). Contractors who operate inside IR35 in the Public Sector will no longer receive the 5% expense allowance.

The net consequence for Public Sector Contractors will be that payments received from agencies will be NET of Income Tax and National Insurance contributions (they will no longer be gross).

Many recruitment agencies are forcing individuals to use a PAYE umbrella company to avoid them having to assess Contractor’s status. This helps them avoid financial risk and operating costs associated with collecting PAYE.

What if I work in the Private Sector?

So far there are no changes to the way IR35 is treated for Private Sector Contractors. HMRC has spoken out to state there will be no roll out of the changes made to the Public Sector to the Private Sector. It is worth noting however many experts predict otherwise and believe it is only a matter of time before the way Contractors work in the Private Sector is reformed.