WHAT IS IR35 TAX AND HOW IT MAY EFFECT YOU AS A TECH CONTRACTOR?
You are probably already aware that laws, taxes and responsibilities can all differ depending on the type of contract and employment status that you have. When working in the UK you can have a full-time or part-time contract, fixed-term contract or be a freelancer, consultant or contractor and it is important to understand what this means.
If you work as an IT freelancer, consultant or contractor in the UK there are various legislation's that you will need to be aware of. The majority of the time when working in this way, you are usually classed as an ‘off-payroll worker’. This means that you are, quite simply, not on the PAYE payroll. The Pay As You Earn (PAYE) system is a method of paying income tax and national insurance contributions.
Whilst this is pretty straight forward, you may be aware that in April 2020 there will be some changes to the off-payroll working rules. As a contractor, you have probably already heard of ‘IR35’ and it is really important that you understand what this is and how it might impact you.
Put simply, IR35 is a piece of UK tax legislation that was enforced in 2000. It was designed to close a loophole in the tax system. IR35 was introduced because the government thought contractors were exploiting the tax system. People would leave employment roles to create limited companies and then return to the same role in a contracted relationship instead.
Currently, when working as a contractor, your contract can either be deemed ‘outside IR35’ or ‘inside IR35’. When deemed outside IR35, you are considered self-employed for tax purposes and you are responsible for making sure that all of your taxes are calculated correctly and paid on time. When deemed inside IR35, you’re considered an employee for tax reasons and you’re required to pay tax at the same rate as an employee in the same tax bracket.
How IR35 can affect contractors
If you are currently working on a self-employed basis, outside IR35, when actually the service you provide reflects employment, inside IR35, and the HMRC finds out, you will be required to pay back the missing tax, plus any interest and penalties. HMRC can investigate as far back as six years, so if you are found non-compliant, it can have huge financial consequences.
Since 2017, in the public sector, the person hiring a contractor became responsible for administering IR35. The liability for paying the tax then transferred from the contractor to the fee-payer, which is usually a recruitment agency for example. However, as of 6th April 2020, these rules will also be rolled out in the private sector too. So, medium and large businesses will now be in charge of setting the IR35 status of their contractors. Although when working with a company that HMRC considers ‘small’, as a contractor you remain responsible for setting your IR35 status.
Working as an IT contractor after April 2020
It is important that when you begin working as an IT contractor after the 6th April 2020 that you understand your IR35 status. You should also know that if you feel as though you have been incorrectly placed inside IR35 when you are truly working on a self-employed basis then you have every right to challenge this decision. You will be able to find out more information regarding how to do this on the government website.
How Techfynder can help
If you are wanting to start working on a self-employed basis and you are setting up as a limited company contractor then Techfynder can help. We can arrange through our partners network, key services across many sectors including payroll services and taxation.
To find out any further information about IR35 in relation to your current situation simply head over to the contractor services section on our website. Here you can select the service you require and the country you are working from and then search for a list of partners that can help
For further information on becoming an IT Contractor, please don’t hesitate to contact the Techfynder team. You can email us at firstname.lastname@example.org and we will gladly provide you with any additional information you require and answer all of your questions.