What is IR35 and Why Might a Dispute Arise?

HMRC routinely check tax payers to ensure that businesses and professionals are accounting for contractor payments correctly.

What is IR35?

IR35 is UK tax legislation which is designed to prevent professionals contracting services on a freelance basis specifically to avoid paying the required tax. It applies to contractors who supply their services via an intermediary, such as a Limited Company or Personal Service Company (PSC), but who would actually be classed as an employee if the intermediary wasn’t used. These workers must pay the same level of income tax and national insurance that they would if they were a regular employee.

IR35 is UK legislation designed to prevent contractors avoiding tax

Contractors who fall outside of IR35 are able to enjoy substantial tax benefits. They can use a dividends model to pay themselves. This in turn means that contractors who operate inside IR35 may be forced to significantly increase their daily pay in order to compensate for any increased tax liability.

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How Does IR35 Work?

The responsibility to decide whether a contractor falls inside or outside IR35 has previously been with the individual contractor. However, in 2017 the rules for public sector contracts changed. The end-client became responsible for determining whether the contract is subject to IR35. If the contract is subject to IR35 then it is the fee-payer (the public authority, agency or other third party who is responsible for paying the contractor’s intermediary) who is responsible. They must then deduct income tax and national insurance from the contractor’s gross pay and report these deductions to HMRC.

Irrespective of whether you work in the public or private sector, if you are found to be in breach of IR35 then you could have to pay interest on tax owed and face steep penalties. You can read more on the HMRC website.

How Can Legal Expenses Insurance Help?

Legal expenses insurance from Tapoly would pay the accountancy costs to help deal with HMRC if a dispute arises following a compliance check.

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If, following a compliance check, HMRC challenge your IR35 status or your compliance with tax regulations, you must contact us as soon as possible. We will appoint a tax expert to represent you in negotiations with HMRC. Once the claim is settled the insurance will pay the expert’s reasonable accountancy fees.

Tax disputes can be complex, stressful and time-consuming, but legal expenses insurance can take some of that strain away. Your legal expenses policy provides financial support and the specialist help required to allow you to focus on the daily tasks which keep your business running.  

If you want advice about paying tax, you can contact the tax advice helpline to get advice from qualified specialists if you are unsure about IR35 legislation or how this may apply to your business. The tax helpline operates between 9am and 5pm on weekdays (except bank holidays).

Future IR35 Reforms

With effect from April 2020 the IR35 ‘off-payroll’ rules will be extended to the private sector, with the exception of small organisations. These are organisations who fulfil two of the following criteria: an annual turnover not exceeding £10.2m; a balance sheet no more than £5.1m; or less than 50 employees. Contractors who provide services to a small business (as described) will remain responsible for determining their IR35 status.