About the IR35 Tax Rule for Subbies

by Editor on November 14, 2012

Are you a self employed electrician?
Are you inside or outside the IR35 tax ruling?

In recent years the construction industry has seen an increase in freelance workers or ‘subbies’. These workers often left their PAYE employment and started a company and were then taken back on as a sub-contractor.

This was an easy way for them to reduce the tax they paid and was also less expensive for their employer who didn’t need to pay employer’s contributions, sick pay and holiday pay.

The IR35 rule is there to assess the way that your tax is calculated should your skills be seen to be provided in the same way as if you were employed on PAYE by the company. This could be applicable to labour only sub-contractors who work mainly for one company.

You generally need to be outside of the IR35 tax legislation  rules if you’re self-employed or have your own company. This article from The Accountancy Partnership explains more…

IR35 for Independent Contractors

Employment status is a common concern for independent contractors in the UK. While you may be self-employed, certain contracts you enter into can see you deemed as an employee, as opposed to contractor, in the eyes of HMRC; and this will drastically alter how much tax you pay. The legislation that determines employment status for contractors is IR35 and, with an estimated 2000 IR35 investigations being carried out by HMRC in 2012 alone, it is imperative you know whether you are “inside” or “outside” IR35.

What is IR35 Diagram

Infographic supplied by The Accountancy Partnership  (click to enlarge)

If you are inside IR35 you will be an employee according to HMRC and will have to pay regular levels of PAYE and NI. You are likely to be deemed inside IR35 if any of the following apply to your work:

–    You receive a regular wage
–    You receive paid holidays, sick pay or pension contributions
–    Your tools or equipment are supplied for you
–    You have a clearly identifiable “boss”
–    You are not financially responsible for the quality or time frame of your work

If any of the above apply to your work and you are paying corporation tax as opposed to PAYE or NI then HMRC would likely accuse you of fraud. Depending on whether your false employment status is judged to be accidental, negligent or deliberate, the penalty for this can range from 30%-100% of the tax avoided.
To be classed outside IR35 you would need to operate in a similar manner to a limited company. Contractors will find themselves outside IR35 if the following apply:

–    They are paid a set amount for a set job
–    They use their own tools and equipment
–    They are financially responsible for doing their work to a set timeframe
–    They are financially responsible for doing their work to a set level of quality
–    They are in complete control of their work

If you are outside IR35 then you are independent according to HMRC and the relevant tax breaks will be available.
If you are still unsure about your jobs status in accordance to IR35 your accountant should be able to advise you.


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