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IR35 Explained | What Is IR35 & Does It Impact You?

What is IR35?

IR35 is a tax legislation in the United Kingdom that was introduced in April 2000 to tackle tax avoidance by individuals who work through an intermediary such as a limited company or a partnership.

The legislation is designed to ensure that individuals who are working like employees, but are engaged through an intermediary, pay the same taxes and national insurance contributions as those who are employed directly by the organisation.

The term IR35 is derived from the number of the original press release issued by the UK tax authority, HM Revenue and Customs (HMRC), when the legislation was first introduced.

Who Does the IR35 Legislation Apply To?

The legislation applies to individuals who work through an intermediary, which could be a limited company, a partnership or an individual. It is designed to target individuals who are providing their services to clients through an intermediary but are in reality working like an employee.

The legislation applies to individuals who are working in the private sector and public sector, and it is the responsibility of the client to determine whether the individual falls within the scope of IR35.

If the individual is deemed to be within the scope of IR35, they will be required to pay income tax and national insurance contributions as if they were an employee of the organisation they are working for. The responsibility for deducting income tax and national insurance contributions from the individual’s fees falls on the organisation engaging the individual.

Background to IR35

The legislation has been controversial since its introduction, with critics arguing that it is complex and difficult to apply in practice. There have been calls for it to be reformed or even scrapped entirely.

The UK government announced changes to the legislation in 2017, which came into effect in April 2021. The changes shifted responsibility for determining the employment status of individuals working through an intermediary from the individual to the client.

Under the new rules, medium and large organisations in the private sector are now responsible for determining whether individuals working through an intermediary should be treated as employees for tax purposes. 

If the individual is deemed to be within the scope of IR35, the client will be responsible for deducting income tax and national insurance contributions from the individual’s fees.

Small organisations, as defined by the Companies Act 2006, are exempt from the changes and will continue to be responsible for determining the employment status of individuals working through an intermediary.

Conclusion

In conclusion, IR35 is a complex piece of tax legislation designed to ensure that individuals who are working like employees but are engaged through an intermediary, pay the same taxes and national insurance contributions as those who are employed directly by the organisation.

The recent changes to the legislation have shifted responsibility for determining employment status from the individual to the client, and small organisations are exempt from the changes.

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