While the COVID-19 crisis was on everyone’s mind this past spring and summer, new tax regulations which affect contractors both in the UK and UK workers contracting overseas, went into effect. And, despite being heavily criticised by tax experts and the business community as ‘being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships for genuinely small businesses’ IR35 will become tax law from April 2021.
By placing stricter regulations on contractors working through a limited company both in the UK and overseas, IR35 removes many of the tax efficiencies these businesses received. Under IR35, many of these contractors will have to pay PAYE and NI (National Insurance) which can hurt profits and set many contractors up for failure if they are unable to comply with the new regulations.
What Is IR35?
So, what exactly is IR35? The HMRC defines IR35 as a “tax legislation designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.” The government sees these contractors as ‘disguised employees’ and the IR35 regulation is another way for Her Majesty’s Revenue and Customs to crack down on this practice.
To make this easier to understand, IR35 is a set of tax laws that form part of the Finance Act. The first piece of legislation came into force in April 2000 and is properly known as the Intermediaries Legislation. IR35 takes its name from the original press release published by the then Inland Revenue (now HMRC) announcing its creation. The income tax element of the Intermediaries Legislation has subsequently been integrated into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), and the NICs element into the Social Security Contributions (Intermediaries) Regulations 2000.
How To Prepare For It
There is a lot of underlying paperwork involved with IR35 and, if it does apply to you, both Chapter 8 and Chapter 10 of the legislation makes provisions for how to pay the extra income tax and NICs. However, under the new rules, the employment taxes cannot be deducted from the contractor’s fees and are paid on top. This difference in tax treatments can mean additional work for you. Instead of deducting your Pay As You Earn (PAYE) salary, a 5% expenses allowance, plus any pension contributions, as with the old way, the fees paid to the contractor, called the “direct deemed payment” are treated as employment income (salary). PAYE and employees NI are deducted from that deemed salary and the fee-payer must pay their employment taxes on top.
If all of this sounds confusing, contacting an overseas tax expert can help simplify the process and ensure that you are compliant with the new tax regulation.
Contact Binks Overseas
To learn more about overseas contracting, contact Binks Overseas today and speak with a payroll specialist who can answer any questions you might have about your company’s payroll needs.
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