If you’re a business owner, you may have heard of the new tax rule IR35. It’s confusing, as it covers a grey area in the realm of self-employment. IR35 is a product of two new tax regulations and was created in order to differentiate between those who are self-employed but technically employed by their clients, and those who are self-employed and run their own businesses.
To minimize tax avoidance, IR35 was created. The details will be explained below how that might impact you and what the fine print of this new tax rule is.
How does IR35 work?
Whether you’re an independent contractor aka self-employed but working for someone else, or if you’re an independent business owner is a question that seems like it would have an obvious answer but is often considered a grey area in entrepreneurship. As taxes are critical when choosing the self-employed route, it’s important to stay up to date with tax regulations.
IR35 was introduced in April 2020 and switched the focus from the individual who is self-employed to the person employing that individual. Before the tax rule was introduced, the self-employed were able to identify themselves as an employee, as employed by a business or organization, or as a self-employed individual working for themselves. Now, however that responsibility was redistributed to the end-client.
The new IR35 rules will determine whether an organization now has to pay them as an employee, regardless of independent contractor status, or if they are considered a truly self-employed individual. Should the individual not fall under the requirement for employee, the organization will have to adjust their books and pay the appropriate income tax.
This information is then recorded and submitted into a database run by the HMRC. Critical information that makes this process much simpler is if the self-employed individual is considered a Limited Company. If they are, then they are considered truly self-employed. If they aren’t, then that leaves for more room to be considered an employee.
Details on Paying Taxes
Before this rule was introduced, the contractor was held responsible to pay any income taxes, while not it’s not their sole responsibility. This responsibility is now shared with the client. However, those who are truly affected by this new regulation are medium to large sized businesses and corporations. Small businesses are not held liable for unpaid taxes, and therefore aren’t impacted by this new tax law.
Anytime a new tax rule is introduced, it is important to understand how it impacts you and your business. If ignored or not understood, it can easily lead to hefty fines and penalties that could have easily been avoided. If there is something you don’t understand in regard to the new IR35 rule, it’s best to hire professionals.
As the penalties for unpaid taxes can be high, no organization wants to be penalized due to a confusing new tax regulation. FD Capital is able to provide the necessary tax support via helping companies hire financial professionals that have a clear and concise understanding of the IR35 rulings, exemptions, and requirements. A simple form filled out by the client, helps determine if the IR35 is something that the business must worry about or not.