In the digital age, intermediaries legislation working has become far more commonplace. Many people now telework on a regular basis rather than commuting to an office. However, this shift in working practices has brought additional challenges for tax authorities and businesses alike. Within this changing landscape, the intermediary services regime is one of the most important points for those who work remotely. It is also one of the most complicated – with many different interpretations and implications depending on your personal circumstances. Here are some answers to common questions about intermediaries legislation and what it means to you…
What is intermediary Service Regime?
The IR35 stands for the Intermediary Services Regime. It is a set of rules that determines whether someone working through an agency is employed by the client or self-employed. The distinction is important, as it determines how much tax you pay and your employment rights as a worker. Working within intermediaries legislation means you are personally liable for tax on the full value of your earnings, rather than paying the standard 20% employee rate. The legislation was created to prevent contractors from ‘shifting their tax burden onto the taxpayer’. It was introduced to address abuses in the 1990s when some people were erroneously classified as self-employed, paying income tax at a reduced rate. The rules were amplified and clarified in the 2000s after a series of court cases, which led to the new rules and regulations we see today.
Why is Intermediaries Legislation so Important?
Intermediaries legislation is one of the most important parts of the transitioning from Employee to Contractor. It is a big deal, because it has the potential to double your tax bill. If you are incorrectly classed as a contractor, you will pay income tax on the gross amount of the job. If you are correctly classed as an employee, the tax you pay will be based on your net earnings – so you will pay 40% tax on your gross earnings, minus any tax-free expenses. It can be complex to navigate, but you can use online tools such as the intermediaries legislation calculator from Contractor Calculator to determine your likely tax position based on your personal circumstances.
The Effect of Intermediaries Legislation on Your Tax Bill
If you are employed and work through an intermediary, your tax bill is calculated on your net earnings. However, if you are deemed to be a contractor, your tax will be based on your gross earnings. According to research, contractors can pay up to twice as much tax as employees, simply due to intermediaries legislation. Therefore, if you are working on a contract through an intermediary, you need to be sure you’re in the right tax bracket.
The intermediaries legislation is designed to prevent individuals from reducing their taxes by contracting as an intermediary rather than an employee. If you are a contractor and your contract meets specific criteria, you must disclose this to HMRC and pay income tax on the earnings that you would have otherwise been able to withhold. If you fail to do so, the organization will be liable for a penalty of up to 25% of the unpaid taxes. You should understand how this affects you, as well as any obligations you have in regards to intermediaries legislation.