The Implications of IR35 on Startups and Small Businesses
It is important to use the right employee status when filing taxes. It will determine your actual income tax obligations, and you will be eligible for tax benefits, deductions, and exemptions if you’re under a certain classification.
Employees are covered by IR35, a government ruling that determines the right employment status against wrongly declared employees. It helps avoid tax evasion and keeps taxpayers from getting benefits they’re not eligible for.
Unfortunately, many employees will declare a different employment status to access these benefits because the status may remain unmonitored for an employer that doesn’t use accountancy services for a small business. Here’s a closer look at how the government handles these types of tax cases.
Dealing With Incorrect Employee Tax Statuses
Her Majesty’s Revenue and Customs (HMRC) created the IR35 legislation to differentiate employee tax status for proper employee taxes and benefits. An employee needs to confirm employee status and details with the correct detailed information. IR35 determines your correct status as either in coverage or outside IR35.
Unfortunately, many regular employees manipulate their tax details to a contractor or freelance status to take advantage of tax benefits and exemptions. It allows them to receive tax benefits under the wrong employee classifications. Take evasion is never a good practice. Couple that with deceptive practices to gain tax benefits, and you have the makings of legal trouble with the government. Eventually, the HMRC will sort out the details and will go after your tax arrears.
Some citizens may not be experienced with personal tax affairs and may wrongly declare their employment status because they don’t know the clear definition of their type of work. Under IR35, there are different statuses to define your employment type properly.
Sorting Out Your IR35 Status
The main differences between a contractor and a regular employee are a certain set of working rules, and they will determine if you are covered within IR35. You need to differentiate your status details by clearly defining these details. Two main qualifying employment terms are the schedules and contracts, and both will determine your status under IR35.
The first term is your type of employment with a set schedule. You are classified as a regular employee when you are under a set work schedule and number of days per week. Freelancers and contractors usually don’t follow a stringent work schedule.
The second qualifying term is your work agreement in your contract. A mutuality of obligation clause in your contract means you are bound to provide work as your employer provides you employment, which forms a basic employment contract.
If you’re a freelancer or contractor, there are no set limits or contracts for an exclusive employer. You can take on different work arrangements on a per-project basis, and you are not bound exclusively to one employer or type of employment.
Clear Definitions for Public and Private Employment
To better manage employee status and its proper definition, private and public sector employers are now required to handle these obligations. Changes made by the British government in 2017 made public work employers responsible for defining their contractor employees if they are in or out of the IR35 legislation. Another update occurred in April of 2020 to do the same for private-sector contractors and freelance employees.
Employers now have to declare their employees themselves, report compensation and employment details, and determine the need for identification for IR35.
Employees have to use the correct employment details to get the proper taxes and benefits due to them. But often, many of them use deceptive ways to reduce tax obligations and take advantage of privileges. It is important to manage taxes and employee information to avoid penalties from the HMRC.
At 1 to 1 Accountants, we believe that managing your employee accounting tasks is best handled by dedicated accountancy services for small businesses. Concentrate on your business processes, and we will focus on running accounting, bookkeeping, and payroll services. Upgrade your business financial services with us today.