IR35 and Tax Investigation insurance

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What is IR35?

IR35 was introduced by HMRC as an anti-avoidance tax legislation, designed to tax ‘disguised’ employment at a rate similar to those in employment.

“Disguised employees” refers to workers who receive payments via an intermediary, often their own limited company, which had they been paid directly, they would be employees. This process allowed workers and their ultimate employers to avoid national insurance contributions, and in some cases income to be paid in the form of dividends adding family members as directors, utilising their tax allowances.

Initially applying to the public sector, the legislation now applies to the private sector from 6th April 2021. The new legislation shifts the responsibility from the individual to the organisation, to assess whether an individual should be an employee or a worker, on-payroll or off-payroll.

How does it affect businesses and workers?

With a few exceptions, the rules apply to all clients who have a turnover over £10.2m, a balance sheet over £5.1m, and have more than 50 employees. Where the client falls outside of these criteria, the responsibility sits with the Worker.

The impact of the new legislation affects both ends of work supply chain, the workers at one end and the client/organisation at the other end. Incorrect employment status assessment will result in not only the tax having to be paid back, with interest, but depending on the circumstances a penalty as a % of the amount owed.

With HMRC estimating the level of non-compliance with IR35 in the private sector will cost an annual £1.2bn by 2022*1 the potential impact on clients and workers could be significant.

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