In order to address a perceived tax loophole, the Inland Revenue introduced regulation IR35 in 2000. The regulation is intended to remove tax benefits from freelance contractors that are "disguised employees”.
As a result, the majority of today’s contractors do not escape IR35, specifically, those contractors who do not meet the Inland Revenue’s self-employment definition.
As a rule of thumb, a contract is caught by IR35 if it:
- Is open-ended/rolling - i.e. no end date
- Has no right of substitution - i.e. sending someone in your place if you cannot go to work
- Makes reference to you, the contractor, as an employee
- Places the contractor under the direction and control of the client
- Is NOT a contract for service
These are some examples of identifying if a contract is caught by IR35 and there are a number of other conditions that need to be considered. Please click IR35 for further information from HMRC.
Umbrella Company Payroll VS. Composite or Limited Company
If you have a contract that is caught by IR35, an umbrella payroll service such as LesterPay, is the only compliant solution available to you!
Some of our competitors may try to propose a Composite Company solution (often called Managed Umbrella Company) or suggest establishing your own Limited Company solution. Despite what they might say, this type of solution is not compliant for contractors caught by IR35.
If you do use such a solution, you will be held accountable for a potential tax bill by the Inland Revenue, not the company who provided you with the service.
So make sure that your solution is compliant, if you are in doubt about your position give us a call and we can help you.
Freephone: 0800 056 70 70
Email: info@lesterpay.com