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Take a look inside the IR35 umbrella or limited company rules

Inside the IR35 umbrella or limited company rules
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    The rules around IR35 are particularly important to know if you are a freelancer due to recent changes in legislation. But it could be useful for anyone who has worked as a freelancer in the past (or plans to in the future) to have a refresher on IR35. Read on for a look inside the IR35 umbrella or limited company rules to find out more.

    Inside IR35 umbrella or limited company rules

    While dealing with tax laws can be complicated, with on initial glance inside the IR35 umbrella or limited company rules, the good news is that it’s not as confusing as it may seem.

    There are a few technicalities to the rule that determine whether it applies to you and therefore if you need to be more aware of it.

    One of the first things you need in order to understand the changes to the IR35 tax laws is to know the difference between an umbrella and a limited company and determine which one you fall under.

    Limited vs umbrella company

    A limited company is one that is completely separate from any other entity, which is in contrast to corporations, for example.

    A limited company is separate from directors and shareholders, has separate bank accounts, income and expenditure, and crucially, has to pay its own taxes.

    Umbrella employment, however, offers wider flexibility without restricting access to broader employment rights. An umbrella company ordinarily employs contractors or temporary workers on behalf of an employment agency.

    Due to the often temporary nature of the work, umbrella companies don’t fall under IR35 regulations.

    What is IR35?

    IR35 is legislation that was brought in to close the loophole being used to minimise taxes. Using the structure of a limited business, some workers were able to pay fewer taxes than they technically owed, despite being in an employer/employee style relationship.

    This loophole allowed workers to start their own limited companies and then return to work for their employers as contractors from exterior firms. Doing this, however, is essentially a form of tax avoidance. As such, the IR35 legislation has been introduced to fix this problem, but it can also cause issues for those who genuinely work in limited business as the rules are fairly subjective.

    Inside vs outside IR35

    Since IR35 was brought in to catch out people trying to benefit from the tax loophole, being ‘inside IR35’ means you are required to pay the same tax as a regular employee. This includes National Insurance and income tax.

    On the other hand, being ‘outside IR35’ means you are considered a genuine contractor or self-employed worker and so you are free to sort your taxes out yourself.

    To determine whether or not you fall inside or outside IR35, read our detailed blog on this subject matter.

    However, your contract must specify details of your services and working arrangement (which reflect a self-employed person) to make sure you aren’t picked up by HMRC for trying to use the tax loophole that IR35 was brought in to counter.

    IR35 in the future

    With recent changes, there is a lot of speculation and concern surrounding the new tax rules. One thing that businesses should bear in mind, however, is that the rules are likely to remain in place, and they should continue to stay vigilant in following them as there is going to be stricter enforcement of them moving forward.

    In fact, from 2023, HMRC will have more tools available to them, which will allow them to identify those using the loophole.

    The best thing to do in the wake of changing decisions is to have a plan in place for the potential repercussions or possible changes. It is better to be in a place where you are prepared than to continue as you are despite being aware of the potential disruption.

    It could benefit you by using this time wisely to contact an accountant who can help you to work out which rules and regulations apply to you as well as what you need to do to make sure you are still paying the correct tax and following the legislation. It could help you greatly to have an outside accountant check these things for you, and even help you to come up with a plan for the future.

    What to do

    The new legislation can be confusing and may cause changes which feel unfair or unjust. If you are still confused by these issues or want help with sorting out your taxes, WIS Accounting can help. We are an accountancy firm that can offer you assistance with VAT, self-assessment, corporation tax, annual accounting and confirmation statement filings.

    Alongside our accountancy services, we can offer other support through our family of businesses. If you need mortgage assistance, head to WIS Mortgages, or for business insurance, WIS Business Protection can help you.

    If any of this support could benefit you, make sure to call us on 0203 011 1898 or fill out our contact form so that we can sort out your issue as soon as possible. Don’t waste time worrying and get in contact with us today!

    FAQs

    Can you use a limited company inside IR35?

    IR35 does apply to limited companies. The legislation is in place for any worker deemed an employee and this includes contractors working as third parties.

    Which is better, limited company or umbrella?

    In terms of taxes, if you want to avoid IR35, an umbrella business is better. This is because umbrella firms don’t have to abide by IR35 rules while limited companies do.

    Can I be a limited company and be paid through an umbrella company?

    It is possible to run a limited company but also work through an umbrella company simultaneously.

    What does inside IR35 Umbrella mean?

    The IR35 rules apply to those who are counted as employees and have an employee/employer relationship, regardless of whether they are contracted. Anyone working for an umbrella company does not have to worry about IR35 as it does not apply to umbrella firms.

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