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IR35 Explained

Many medium and large businesses have heard of this new tax regulation, IR35, being implemented that will be impacting them primarily. Small businesses are exempt from this new regulation. However, with this change come many questions as it is a confusing rule that tries to pinpoint the grey area of self employment.

Why was this implemented?

The main goal of IR35 was to decrease (and possibly eliminate) tax avoidance of large businesses. Whether this rule will actually accomplish that is up for debate, however it is important as a large and medium-sized business to understand what it is and the implications on your taxes.

A problem that has become more prevalent is the lacking definition of self-employed. There are many contractors, who don’t operate as such, but are truly employees of an organization. Since there are differences between taxes for those who are self employed and considered a Limited Company, and employees, many businesses take advantage of these tax benefits for Limited Companies by claiming their contracted employee is self employed.

Businesses will essentially lie about their employee’s status in order to avoid paying benefits, while the employee will go along with it to be able to take advantage of the tax benefits a small business or independent contractor has access to.

Some terms that frequently come up in the discussion of IR35 is if someone was considered inside or outside of IR35. What does this mean? Inside of IR35 means that the person will be viewed as an employee from the tax perspective, while outside of IR35 confirms that you are indeed a self employed individual.

How do you know if someone is inside or outside of IR35?

As HRMC is the one who came up with this regulation, they’ve also provided a tool called the Check Employment Status for Taxes (CEST) that will ask individuals a series of questions to help determine whether or not someone is inside or outside of IR35. Using the tool isn’t foolproof though. There have been several cases where someone was considered inside the IR35 but after taking that case to court were considered outside of IR35.

How does this impact you

If you are an employer, then it is now your responsibility to determine the status of employment for the independent contractor in comparison to them determining it for themselves prior to this new regulation. When found that you have not complied to the rule, you could face a hefty fine, which is completely avoidable and therefore unnecessary.

FD Capital

As the exact rules are difficult and complex to understand, it can be helpful to hire professionals to help determine the employment status of those working for an organization. FD Capital has many professionals who can help do just that in a timely and efficient manner. No matter how confusing it may seem right now, FD Capital’s employees will know how to handle it. Hiring professionals allows you to focus on the things that are important to you, while ensuring that you avoid paying any fines or fees for noncompliance.

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