Since it’s introduction in April 2000, this Government legislation has given many a contractor a headache – even landing quite a few with a hefty bill for unpaid tax.
But to find out why it was introduced in the first place, we have to climb aboard our time machines and take a trip back to the 80s.
This decade not only saw the rise of Yuppies, big shoulder pads and even bigger hair, freelancing was on the up too, operating via Personal Service Companies (PSCs). This growth continued well into the 90s, when employees started to leave their jobs en-mass (encouraged by their employers), only to return immediately as a contractor to do the exact same job. All with the cunning premise of avoiding the taxman.
But the taxman soon caught on to the ruse, and introduced the new IR35 legislation. It doesn’t outlaw PSCs or limited companies, or imply that they’re not legitimate ways to operate. What it does is apply a special tax calculation and liability on a PSC in certain circumstances, where a contractor’s skills are provided in a way deemed to be the same as employment.
IR35 is only an issue to those operating through a limited company, as a sole trader, a corporate partnership or a common law partnership. But if you operate through an umbrella company you’re effectively an employee – which means IR35 doesn’t apply.
So if you’re deemed employed, you’re inside IR35 and subject to higher tax. If you’re deemed self-employed however, you’re outside IR35.
How ClearSky can maximise your take home pay
Firstly, you have to be deemed outside IR35, which requires careful management and planning to make sure your services are provided on the right basis. And there’s nobody more qualified to help you do just that than ClearSky. They’ll assess your personal circumstances and specific contract to determine your IR35 status and offer accurate advice every time your contract changes.
If you’re deemed inside IR35, it could still make financial sense to set-up your own company, but it might not be enough to make the additional responsibility worthwhile. In which case, we recommend you stick with us here at Parasol.