IR35: How It Might Affect Your PSCs

What Is IR35?

IR35, also known as the "Intermediaries Legislation," is a tax law introduced in the United Kingdom to combat tax avoidance by individuals who work through intermediary companies, such as personal service companies (PSCs). It applies to contractors and freelancers who provide their services to clients through an intermediary rather than being directly employed.

What Are The Changes?

Before the implementation of IR35, it was the responsibility of the contractors to determine their tax status. However, under IR35, the responsibility shifted to the client or the end hirer to assess the contractor's employment status for tax purposes. If the contractor is deemed to be a disguised employee, the client or end hirer is responsible for deducting the appropriate taxes and National Insurance contributions before paying the contractor.

How Does It Affect Contractors?

The effects of IR35 can be significant for contractors and businesses alike. For contractors who IR35 catches, it means that they may be subject to higher tax and National Insurance liabilities. As a result, their take-home pay could be reduced compared to what they earned previously.

How Does It Work?

Essentially, a company's income is subject to income tax and national insurance, corporation tax, and subsequent income tax on dividends for money withdrawn from the company.

How Does It Affect Employers?

For businesses, particularly those that rely heavily on contractors, IR35 can lead to increased administrative burdens and costs. They must carefully assess the employment status of their contractors and make accurate determinations. If a contractor is found to be inside IR35, the business may need to account for employer National Insurance contributions and other employment-related costs.

Our Final Thoughts

The implementation of IR35 has also led to some controversy and concerns. Critics argue that the legislation is complex and its enforcement is challenging, leading to confusion and potential unfairness. There have been reports of contractors being wrongly classified as inside IR35, causing financial difficulties and disputes.