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Self-employed versus employed

Indeed, a business is no longer able to employ a supposed contractor with a view to avoiding liability for the employer’s National Insurance and tax contributions. The law was tightened up considerably in April 2000 when new legislation called IR35 was introduced.

The new rules were specifically brought in to combat problems within the building industry. The Inland Revenue and the government believed that too many building contractors were claiming self-employed status. The reality of the situation however, according to the Inland Revenue, was that these people were in fact working in such a way that they simply could not be deemed to be self-employed.

IR35 was therefore brought in to cover those contractors who did not meet the Inland Revenue’s definition of ‘self-employed’.

So, what are the rules of IR35?

IR35 applies to those contractors who work through via a service company. These contractors, but for the existence of their service companies, would be deemed to be employees of the client for whom they are providing their services. Contractors who fall under the provisions of IR35 will be expected to pay tax under Schedule E together with National Insurance contributions. Expenses will be deducted from revenue earned alongside tax and National Insurance. The balance is then paid out to the contractor through the contractor’s service company. This income is called the ‘deemed payment’.

What are the consequences of IR35?

It is vitally important for employers to realise that the rules used to determine whether a contractor falls within the scope of IR35 are the same as or similar to those rules used to determine whether someone is self-employed or an employee.

This can be critical when it comes to employment legislation. For example, a contractor who is genuinely self-employed cannot bring a claim of unfair dismissal. An employee, on the other hand, can. If an employer has a contractor working under IR35 there may be some argument to suggest that the contractor is not genuinely self-employed and may therefore be entitled to protection under existing employment legislation.

Next week I’ll be looking at what employers should be wary of.


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