IR35 is a set of tax laws which form part of the Finance Act. The first piece of legislation came into force in April 2000 and is properly known as the Intermediaries Legislation. IR35 takes its name from the original press released published by the then Inland Revenue (now HMRC) announcing its creation.
The income tax element of the Intermediaries Legislation has subsequently been integrated into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), and the NICs element into the Social Security Contributions (Intermediaries)Regulations 2000.
In April 2017 the Government introduced the "Off-Payroll Reforms", which is a separate piece of new tax legislation that applies to the public sector, but which is also, albeit confusingly, referred to as"IR35."
The new Off-payroll rules were an admission by HMRC that the original rules were unenforceable. Whilst they both contain the common theme of "deemed employment", the newer rules introduce a different set of tax treatment, meaning that firms will now have to assess the contractor’s status, but, more importantly, pay employment taxes on top of the fees paid to the contractor.
If IR35 does apply, then each piece of legislation (both Chapter8 and Chapter 10) makes provision for how to pay the extra income tax and NICs. But pay special attention to the different tax treatments, because under the new rules (Chapter 10), the employment taxes cannot be deducted from the contractor’s fees and are paid on top.
Under the original rules, when IR35 has been found to apply to an IR35 contract, then you need to calculate what is known as the deemed payment on your limited company income. This means that you deduct your Pay As You Earn (PAYE) salary, a 5%expenses allowance, plus any pension contributions.
What is left must be treated as if it were the gross cost to the employer, including all employment taxes, before calculating all the additional tax due. In practice, if you are certain your contract is caught by IR35, then the simplest solution is to pay out all your limited company’s fees less legitimate expenses and pension contributions as a PAYE salary. Because you are paying yourself like an employee, then IR35 won’t apply.
Under the new rules, the calculation is much simpler. The fees paid to the contractor, called the "direct deemed payment" are to be treated as employment income - which means just like a salary. This means PAYE and employees NI is deducted from that deemed salary. Then the fee-payer, which could be the agency or hirer, has to pay their employment taxes on top - these cannot lawfully be deducted from the contractor’s fees.
Furthermore, CANGAF provide accounting, tax returns, business, and advice on IR35 so please don’t hesitate to get in touch.
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