IR35 legislation, also known as the Intermediaries Legislation, was first introduced in the United Kingdom in 2000. The legislation was intended to address the issue of tax avoidance by individuals who were working as contractors or freelancers, but who were effectively behaving as employees.
Before the introduction of IR35, individuals who worked as contractors or freelancers were able to set up their own limited companies and take advantage of the lower tax rates and national insurance contributions that applied to companies, rather than individuals. This meant that they could reduce their overall tax liabilities and keep more of their income.
IR35 was introduced to address this issue by determining whether an individual was working as a self-employed contractor or as an employee in disguise. The legislation introduced a series of tests that individuals had to pass in order to prove that they were truly self-employed. If they failed these tests, they would be considered as employees for tax purposes and would be subject to the same tax rates and national insurance contributions as any other employee.
In the context of an Umbrella company, IR35 legislation has a significant impact. An Umbrella company acts as an intermediary between the contractor and the client, meaning that the contractor is technically an employee of the Umbrella company. This means that the contractor will be subject to the same tax rates and national insurance contributions as any other employee, rather than the lower rates that apply to self-employed individuals or limited companies.
However, Umbrella companies, such as Exact Payroll have the advantage of providing contractors with a range of employment benefits, such as holiday pay and sick pay, as well as liability insurance. They also take care of the administrative tasks associated with invoicing and receiving payment from the client, which means that the contractor does not have to worry about setting up their own business or dealing with accounting and legal issues.
In recent years, there have been several changes to the IR35 legislation, which further clarifies the rules and makes it harder for individuals to falsely claim self-employed status. However, Umbrella companies continue to provide a valuable service for contractors, simplifying the process of invoicing and getting paid, providing security and stability, and offering access to employment benefits and liability insurance.
In conclusion, IR35 legislation was introduced in the United Kingdom in 2000 to address the issue of tax avoidance by individuals who were working as contractors or freelancers, but who were effectively behaving as employees. The legislation introduced a series of tests that individuals had to pass in order to prove that they were truly self-employed. Umbrella companies have become a popular choice for contractors as it provides a range of benefits and take care of administrative tasks associated with invoicing and receiving payment from the client, while being compliant with the IR35 legislation.