IR35 is a term that describes two sets of tax legislation. The legislation is targeted at workers, and the companies employing them, avoiding tax that would would normally be paid if they were employees. These workers may set up intermediary companies, eg. a limited company, to alter their tax status.
HMRC calls these workers ‘deemed employees’. If caught by IR35 legislation, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed.
The financial impact of IR35 can be significant. It can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.
They Government is replacing the original IR35 legislation with the new Off-Payroll Tax, already in place in the public sector, which will be extended to the private sector from April 2020.
The new Off-Payroll rules mean that firms will now have to assess their workers’ status, but, more importantly, pay employment taxes on top of the fees paid to the contractor. This new tax is now widely referred to as the “Off-Payroll Tax”.