IR35 Tax Legislation Means Higher Taxes for Self Employed
There have been many complaints and many more enquiries into self assessments due to the new IR35 tax legislation. This legislation basically says that someone working for themselves can be considered an employee for tax purposes, and applies mostly to personal services that are companies with only one owner and employee, such as secretarial services and IT services. Basically, under this legislation, the HMRC can review the contract between the worker and the client company, and formulate a hypothetical contract that shows the worker to be a disguised employee. For example, an IT professional who may work Monday through Friday for three months for one company, then do the same thing with another company, would be considered an employee rather than a service for the purposes of taxes.
This is one of the situations in which tax advice and consultancy can really become helpful. If the HMRC tries to claim that you are a disguised employee, but you qualify as self employed under their own rulings, you can avoid being taxed as an employee on your wages, instead having to collect and pay the VAT tax on those service fees, which is much lower. In this way you can easily dispute the ruling, and “win” the aspect enquiries. However, because this practice is becoming so common, you should have IR35 cover in your Tax Enquiry Insurance, and make sure that you have the support and advice of an agent to help you legally dispute the issue.