The New Rules Governing IR35

IR35 rules were implemented in April 2000 in a bid by the UK government to prevent contractors who were effectively disguising themselves as employers in a bid to reduce their tax liability. Prior to the introduction of these regulations, contractors were able to form a limited company and set themselves up as both a company owner and disguised employee. This meant tax reductions as well as the benefits of owning a limited company and IR 35 rules were established to prevent this.

Unfortunately, ambiguity does exist in the employment status set out by the Inland Revenue and this means that it can be very difficult to determine whether you are considered employed or self employed in the eyes of the government. It is important, however, to ascertain your status so that you can work legitimately and avoid IR35 penalties.

Essentially, those contractors that are deemed as being self employed will gain the greatest benefits but if the government believe that you fall on the employed side of the divide then you will be taxed accordingly. With an employed status it will be necessary to pay employees' National Insurance and Income Tax but you may not receive a lot of the benefits that those in full employment status receive.

Using a professional and experience IR35 accountant or contractor accountant it is possible to initially determine whether you will be considered employed or self employed by the Inland Revenue. Many contractors are forced to negotiate contracts, unaware of whether they should be including full tax liability in their costs. This may mean producing quotes that are excessively high or losing out on profits should you find that the Inland Revenue do consider you to be employed rather than self employed.

A contractor accountant will be able to discuss your options with you. They will determine the most beneficial contractual agreements you can enter into as well as the most beneficial working practices to help avoid paying excessive taxation. An IR35 specialist will also be able to advise you whether or not you should enter into a particular agreement or whether doing so would ultimately cost you more than it would benefit you.

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