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December 19, 2022
There are many different ways that people can work as contractors. One way is to work through an agency. In this article, we will discuss the pros and cons of working as a contractor through an agency under the IR35 tax rules.
IR35 is a form of legislation that was introduced in the UK in 2000 and relates to tax treatment specific to contractors working through intermediaries, such as an agency. It requires contractors to pay the same tax and National Insurance contributions as those individuals who are employed without offering them any of the same benefits or potential longer-term job security.
Many large companies have come under scrutiny recently for misclassifying their contractors so they can take advantage of avoiding both IR35 legislation and associated taxes. With large companies trying to dodge the rules, it’s down to contractors to make sure they understand the implications.
This can make things complicated for contractors who may not have full knowledge of this law, so it is always wise for them to seek professional advice before taking on any contract work.
To ensure compliance with IR35 regulations, it’s important to understand the criteria for determining whether someone is an employee or an independent contractor. Factors that could be used to make this determination include control over the work; who supplies the equipment and materials; financial risk regarding profit or loss; and consideration of mutuality of obligation which assesses if there exists an ongoing relationship between the parties.
Additionally, contracts should determine a clear payment schedule and should make use of other stipulations such as notices needed to terminate services to create clear boundaries between employer and employee. With these considerations in mind, companies can better assess a contractor’s status and ensure they are compliant with IR35 regulations.
Non-compliance with IR35 rules can be costly, regardless of whether a business is an end client or intermediary. Companies who are found to be in breach of the legislation can expect HMRC (Her Majesty’s Revenue and Customs) to step in and take serious action.
This might involve carrying out costly investigations, applying punitive fines and potentially launching criminal proceedings. As such, businesses should take extreme care when determining the status of their contractors as well as make sure they comply with all other aspects of the law governing payments to contractors.
Taking steps such as ensuring that contracts are up-to-date, accurate and compliant will not only protect workers but also save time, money and legal difficulties for the business itself in the long run.
With the April 6, 2021 commencement of the new HMRC IR35 legislation for private sector businesses, many contractors need to be aware of the changes and how this impacts their working arrangements.
The best way to minimise the risk associated with potentially falling into IR35 legislation is by taking active steps to ensure you are deemed as outside IR35 and able to work as a contractor without significant setbacks.
This requires assessing whether or not each of your contracts would be considered a ‘disguised employment’ and if they do, then understanding what must be done in order to become compliant.
Other factors which may affect your status include differences in shift patterns or regular fluctuating hours, having contracts come from more than one entity and whether or not you are integrated and supplied additional services to the end customer.
In short, a thorough examination should be made for all current arrangements in order for the individual contractor or agency engaging them to ascertain their respective position when it comes to IR35.
For many contract-based workers in the UK, IR35 can be a daunting prospect. It is important to understand if you are caught by the legislation and if it applies to your particular assignment(s). For those who believe they may fall under the scope of IR35, there have been questions raised as to whether using an umbrella company is worthwhile in avoiding its impacts altogether.
While it is true that an umbrella company allows you to operate outside of the rules and regulations of the legislation, the resulting higher taxes, national insurance contributions and other financial costs may mean that this route isn’t always the most cost-efficient solution for certain contractors in terms of their bottom line.
Ultimately, deciding whether or not choosing an umbrella deal will work out best for you or not depends on a number of factors; it is clear that what works for one contractor might not necessarily work for another.
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