Everything About IR35 and How to Use IR35 Tax Calculator

What is IR35?

IR35 is a terminology used to define two sets of tax regulations that are made to combat avoidance of tax by the following participants:

  • workers; 

  • the companies who hire workers who provide services to clients through an intermediate limited company.

These types of workers are referred to as ‘deemed employees’ by HMRC or “Her Majesty’s Revenue and Customs”. If workers are found to come under the regulation of IR35 contractor UK, then they will have to pay both National Insurance Contributions and income tax as if they were employed by that company. 

This IR35 guide will tell you all about the original IR35 regulation, the modified IR35 regulation or Off-Payroll Tax, and who comes under the IR35 rule. 

Here are a few important facts that one must know about IR35:

  • It is a group of tax laws that forms an integral part of the Finance Act;

  • IR35 was initially introduced in April 2000. It was called the “Intermediaries Legislation”;

  • IR35 got its name from the press published by the then “Inland Revenue” that declared its creation. At present, Inland Revenue is called HMRC;

  • The basic idea for the introduction of the IR35 contracting regulation was to identify 'disguised employees. This ensures that such workers will need to pay the right tax amount. The legislation is very complex and it could cause HMRC to categorize contractors in its boundaries. 

The income tax part of the IR35 gov UK Intermediaries Legislation was integrated into the Earnings and Pensions Act 2003. The NICs element, on the other hand, was integrated into the Social Security Contributions Regulations 2000.

  • Since the introduction of the IR35 rule in April 2000, it has been heavily criticized by tax experts and the entire business community. This is because of poor implementation by HMRC IR35 that can lead to unnecessary struggles and costs for legit small businesses. 

  • Due to this reason, the Government is now substituting the original IR35 regulation with the new Off-Payroll Tax. The new regulation was introduced in April 2017, in the public sector. The same is extended from April 2021 to the private sector.

  • If you are a freelancer, independent contractor, consultant, or interim worker, you should be careful about IR35. By default, these arrangements come under IR35 exemptions. Companies that recruit independent contractors, freelancers and remote workers need to assess whether these arrangements fall '' in IR 35' or out of ''IR 35'. They are advised to perform the necessary steps at the time of recruiting and engaging their workers.

  • There is a difference in the amount of tax payable by the contractor IR35 based on within or outside IR35. Contractors who fall within IR35 will have to pay a higher amount of tax as they are classified as employees instead of as independent contractors. There are several strategies that one can adopt for ensuring that they stay outside IR35. 

What is an IR35 Tax Calculator?

As we have seen, the financial impact caused by IR35 is significant. The IR 35 calculator is a great tool that helps workers find out how much more tax they are liable to pay when their contract work comes under the IR35 rules.

Below are the guidelines on using the IR35 tax calculator:

  • There are several mandatory fields that the user needs to fill in to compute their net income – inside and outside IR35.

  • The calculator presumes that a contractor works five days a week, and 44 weeks days every year.

  • Travel expenditure includes expenses incurred on travel, accommodation costs, and subsistence incurred on contract duty.

  • Pension contributions are a kind of payment towards schemes that are made through a limited company.

  • The calculator displays the impact of the existing IR35 regulation on income (Section 8 of the ITEPA 2003). 

  • To make the calculation simpler, the calculator doesn’t consider the Employment Allowance. Furthermore, Corporation Tax is applicable at the rate of 19%.

  • All tax rates that the calculator uses are for the 2020/2021 tax year.

Can you Avoid IR35?

IR35 can cause a significant financial impact on workers and the businesses that employ them. It can diminish the net income ( aka the cash they take home) of workers by around 25% if they are deemed to be classified as '' in IR 35''. Due to this reason, more and more independent contractors are familiarizing themselves with IR 35 rules and the evidence that is to be kept to prove their status.

Independent contractors and freelancers need to make arrangements for obtaining and keeping specific documents to confirm that they lie outside the IR35 regulation criteria. In case of any dispute, HMRC will take the assistance of a tax inspector to conduct a tax inspection who will look at the evidence. They will take evidence to find what exactly happened between the contractor, the agency, and the client.

In general, independent contractors and freelancers are expected to provide a specific service for a given fee. They also need to demonstrate their independence from the employer and the ability to control the working process, the right to choose their work schedule, etc.  Using equipment provided by the employer, working out of the office premises of the employer and performing the same tasks as a full-time employee is likely to result in the independent contractor being classified as an employee.

Thus, it is beneficial for independent contractors and freelancers to bring their own equipment and have some proof in the letter of engagement. Ensuring that freelancers and independent contractors don't depend on the income generated via a single client is also vital for proving that they are '' out of IR 35''.

The report produced by the IR35 Testing tool proves to be an effective confirmation of arrangements and duly signed by the client. In addition to it, an independent contractor can also demonstrate proof of their right to substitute the worker working on the assignment with the client.

Conclusion

IR35 came into force for the identification of 'disguised employees' and to make sure that they are properly classified and pay the right tax amount. However, the legislation is very complicated and  HMRC tends to categorize independent contractors in its boundaries. An IR35 tax calculator is a beneficial tool that helps evaluate the influence of the original IR35 regulation on net income. Companies usually rely on HR software to manage their IR35 Contracts. One such tool is the  Freelance Management System from Transformify, a UK-based company helping businesses to properly classify their workers as employees or independent contractors, ensure compliance with IR 35, automate billing and payments and manage the relationship with their workforce.