In this article, we’ll discuss a few important things about IR35 that’ll help you understand that what this legislation actually is and how the contractors will be affected by this.
We’ll also talk about why the contractors should take help from an ir35 umbrella company if they get caught by the IR35 rules.
What is IR35?
In April 2000, the intermediaries’ legislation came into action via schedule 12 of the Finance Act. The proposed new rules were first mentioned in the Inland Revenue press release where it was named as IR35.
These rules are specially designed for people who work as normal employees in the different organization on the same conditions on which they’re running a limited business of their own.
In order to comply with IR35, contractors need to make sure that the way they work and the wording of their contracts should demonstrate that they’re not merely ‘disguised employees’ but they are genuinely ‘in business on their own account’.
Many contractors choose to work with umbrella companies instead of working via limited companies because they’ll fail to attain the tax benefits of working via limited companies if they get caught by IR35.
Umbrella Companies and IR35
You’ll be taxed as an employee if you consider working through an umbrella company. You’ll pay National Insurance Contributions and income tax on your income.
Contractors who work through their own limited companies while they’re caught by IR35 are also taxed as normal employees. The tax rules of the limited companies are similar to the rules of umbrella companies as the contractors get paid a deemed salary in the limited companies after the deduction of 5% from a turnover on relevant engagements.
If you’re caught by IR35, you can still enjoy some benefits of working via a limited company but they are reduced vastly.
Advantages of limited companies
- Working via an umbrella company is less tax efficient than contracting via a limited company. Typically, a small salary is paid to the limited company contractors, where they can withdraw the rest of the revenue in the type of dividends. On company dividends, NICs are not payable.
- The advantages of incorporation are decreased to a specific limit if you are caught by IR35 but you may still have the ability of taking advantage of using the 5% expenses allowance and joining the flat rate VAT scheme.
- If you’re willing to present an official image of your company and have other business interests, then having a company will be beneficial.
- As the name suggests, as a director, your personal liability is limited if things go wrong. You only have the exception if you personally assure the bank loan to the enterprise.
- Both the financial and administrative affairs of the company are under your control as a director.
- You must keep these points in your mind if you want to stay secure from getting caught by IR35.