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IR35: How the Public and Private Sector reforms affects contractor
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What is the IR35 Public Sector and Private Sector Reform for Contractors?
IR35 is a legislative measure designed to tax 'disguised employees' at a similar rate to employees. A ‘disguised employee’ is an employee who operates as self-employed through an intermediary, such as a personal service company, in order to avoid paying National Insurance Contributions (NIC) and Income tax at the levels a traditional employee would.
Following an increase in the number of contractors working for both public and private sector bodies, the Chancellor highlighted the importance of ensuring that all contractors are taxed appropriately. If their duties closely replicate those of employees, they will be taxed as an employee would be.
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During the Autumn Budget statement in 2016, the Chancellor announced changes to IR35 legislation in the public sector in order to tackle abuse of this system. From April 2021, these rules were rolled out to the private sector for medium-sized and large businesses.
The IR35 changes consisted of tightening the rules around contracting within both the public and private sector by shifting the responsibility for determining IR35 status to the end-client. This is due to the understanding that they are better placed to understand the role and responsibilities of the contractor and therefore would be able to differentiate whether they should be treated as a contractor, or an employee.
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What do the IR35 Public and Private Sector Reforms mean in practice?
The IR35 reform highlights that the end-client will be responsible for determining IR35 status, rather than the contractor themselves. The shift in responsibility means that the engager should be educated on IR35 legislation to be able to determine whether the contractor falls inside IR35 or outside IR35.
HMRC developed the ‘Check Employment Status for Tax’ (CEST) tool to help determine whether the contractor is genuinely self-employed, or should instead be classed as an employee for tax purposes. Those caught inside IR35, will be required to pay NIC and Income Tax. The tool has been designed for contractors, agencies and the hiring body.
Authorities which may be affected by IR35 include:
- Governmental departments
- Fire and police departments
- Channel 4
The IR35 reforms and the impact this has had on the tax and National Insurance liability of contractors has forced many into changing their operating structures in order to maximise take-home pay. For some this has involved transitioning over to employment and closing their now redundant limited company. If you resort to closing your limited company, ensure that you speak to one of our licensed insolvency practitioners to explore possible solvent liquidation options.
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As a result of the IR35 changes, you may be considering closing your limited company in order to pursue a more tax efficient way of working. Get in contact with a licensed insolvency practitioner at one of our offices nationwide to explore the best solvent liquidation option, including a Members’ Voluntary Liquidation. We are experienced in IR35 liquidations and can help settle outstanding affairs with creditors prior to closing your limited company, and allowing you to extract the money tied up in your company in the most tax-efficient and cost-effective way possible.
Further Reading on IR35: How the Public and Private Sector reforms affect contractors
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