Contractors and freelancers operate through a private company to enjoy a better tax treatment compared to sole traders — but a more favourable tax position is actually never guaranteed because of off-payroll working rules known as IR35.
According to IR35, if a contractor or freelancer has a working relationship with a client that is more akin to regular employment, that worker has to pay income tax and National Insurance contributions on their income, rather than the more generous corporation tax.
This is called ‘deemed employment’, and working out whether you or your contractor are deemed employees can be difficult. At first, the responsibility for determining employment status fell solely on the worker themselves. However, reforms in 2017 for the public sector and 2021 for the private sector shifted this burden to the client engaging a contractor’s services.
According to estimates by HMRC, around 130,000 workers are likely to have been affected by the 2021 reform. It’s essential that both contractors and clients understand how to comply with off-payroll working rules and what happens when it goes wrong.
Whether you’re a contractor yourself or hiring someone to carry out work for you, making mistakes can lead to time-consuming tax investigations and costly penalties.
>> Download our ‘IR35 – what happens when it goes wrong’ guide
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