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Thursday, 29 July 2010 |
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UK contractor tax laws explained
Thursday, 27 March 2003
Introduction to IR35
In the budget speech 1999 the Chancellor made reference to what he called "tax avoidance" by those operating through personal service companies - the detail of the measures initially proposed by the Inland Revenue were contained in their Press Release IR35 - the name stuck and the lobbying began.
IR35 explained
IR35 is the term given to the new government legislation, which was introduced to increase the level of social contributions paid by contractors
The Inland Revenue will now test your contract to determine whether you are one of two types of contractor in their eyes. There really is no grey area, you are either deemed a genuine contractor or 'akin to employed'
If you are a genuine contractor, i.e. you pass IR35, you can continue to pay yourself a small salary and take the rest of your income in the form of dividends, which don't incur national insurance contributions
However, if you fail IR35 and deemed 'akin to employed', that is, you look more like an employer than a genuine consultant, you can no longer take dividends from the company. In comparison to the first method, this will result in a reduction of approximately 8- 15 % on your net income
This doesn't just affect the I.T. workers; all contractors, whatever their industry are affected by it
In order to test your engagement, the Inland Revenue will apply a series of questions to your contract. Such as,
- Do you have more than one client?
- Do you provide your own materials on site?
- Is your contract project based with deliverables and milestones
- Do you have the right to substitution?
- Are you under any direct control and supervision?
- Are you taking any financial risk? i.e. you will only be paid once you have met agreed goals, and this will remain the same, regardless if your time spent on a project
- takes longer than originally stated.
The last question is the key area where most contractors are caught. Around 95% of contractors fail IR35 due to this, so you are by no means in the minority.
In Summary
1. Contracting through the Limited Company remains the best option for most Contractors.
2. The impact on the contractor's net pay position, assuming the full IR35 impact, is likely to result in a loss of take home pay of between 7% and 15%.
3. It is imperative that Contractors get accurate advice from their accountants on IR35 as it is the Contractor who bears the responsibility for any unpaid or underpaid Tax and National Insurance.
4. Contracting remains a viable and beneficial career opportunity
For more information click here.
360-group
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360 GroupSee this re 360 Group http://www.namesfacesplaces.com/html/view_news_article.asp?id_no=1312&photopage=0 Amos, 12/16/2003 08:59:59 AM
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