IR35 can affect any individual providing their services to clients through an intermediary business, such as a partnership or a limited company where the proprietor of the business (or ‘service company’) is a director or shareholder.
IR35 focuses on PAYE and national insurance
HMRC introduced the IR35 legislation to combat perceived avoidance of National Insurance charges and PAYE income tax on drawings extracted from companies as dividends.
The service company works with a client to provide the individual with the required services. Because of this, the individual may choose to draw remuneration from the service company in the form of salary or dividends, the latter carrying no burden of Class 1 National Insurance Contributions (NICs) for either the individual or service company.
IR35 depends on the type of relationship between contractor and client
IR35 bites when the client/individual working relationship resembles that of an employer/employee; a master/servant relationship that would normally exist under the terms of a Contract of Service.
The relationship between the (service company’s) client and the individual is looked at, ignoring the presence of the service company.
If the relationship between the client and individual resembles that of a client engaging the services of a self-employed worker under a contract (for the supply of a service); the service company has the freedom to remunerate the individual in any way it sees fit, whether by salary under PAYE, or by dividend.
“Deemed payments” under IR35
If payments from a client are under a contract caught by the IR35 rules, the service company is obliged to operate PAYE income tax and National Insurance Contributions.
Why you should contact us for IR35 help and advice
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