Key takeaways:

1. The IR35 legislation aims to tackle disguised employment by workers who provide their services through an intermediary, such as a limited company.
2. The recent update to the IR35 legislation shifted the responsibility of determining the employment status of contractors from the contractors themselves to the end client for medium and large businesses in the private sector.
3. International contractors who provide their services to a U.K. client through an intermediary may also be subject to the IR35 legislation, which can have significant implications for their tax situation and the way they run their businesses. Seeking professional guidance is recommended to manage any potential risks effectively.

The Intermediaries Legislation, or IR35 as it is commonly known, is a piece of legislation in the U.K. that aims to tackle what HM Revenue and Customs (HMRC) consider to be 'disguised employment'. This occurs when a worker provides their services through an intermediary, such as a limited company, but would be classed as an employee if this intermediary was not used.

The Ins and Outs of IR35 Legislation

Introduced in 2000, the IR35 legislation has seen numerous changes and revisions, with the most recent major update coming into effect in April 2021. This update shifted the responsibility of determining the employment status of contractors from the contractors themselves to the end client for medium and large businesses in the private sector.

To understand whether a contractor falls inside or outside the IR35 legislation, several factors are considered, such as:

Control: Does the client control when, where, and how the work is done? If so, this could point to an employment relationship, and thus, the IR35 rules may apply.

Substitution: Can the contractor send someone else to do the work? If the answer is no, then this could also suggest an employment relationship.

Mutuality of Obligation (MOO): Is the client obliged to provide work, and is the contractor obliged to accept it? If this is the case, this may indicate an employment relationship.

IR35's Impact on International Contractors

The IR35 legislation also applies to international contractors who provide their services to U.K. clients through an intermediary.

Take John, a software developer based in Spain, who provides his services to a U.K. based tech company, TechUK Ltd., through his Spanish limited company, JohnTech S.L.

In this case, if John's working relationship with TechUK Ltd. falls inside the IR35 rules (i.e., he is deemed to be an employee for tax purposes), then TechUK Ltd. will be responsible for deducting income tax and National Insurance Contributions (NICs) from John's fees and paying them to the HMRC.

On the other hand, if John's working relationship is deemed to fall outside the IR35 rules (i.e., he is genuinely self-employed), then John can pay himself a salary and dividends through his Spanish limited company, JohnTech S.L., and he will be responsible for paying any Spanish taxes due.

It's important for international contractors to understand that even though they might be based outside of the U.K., if they're providing their services to a U.K. client, the IR35 legislation could potentially apply to them. This can have significant implications for their tax situation and the way they run their businesses.

Seeking Professional Guidance

It is recommended for both contractors and businesses engaging with contractors to seek professional advice when dealing with the complexities of the IR35 legislation. This is particularly important given the financial risks involved with non-compliance, which can include significant penalties and interest charges on any unpaid taxes.

To Wrap It Up

Understanding and navigating the IR35 legislation can be a complex task, particularly for international contractors working with U.K. clients. However, with a clear understanding of the rules and professional guidance, it's possible to operate within the legislation and manage any potential risks effectively.

Hiring contractors? Thera can save you a ton of time

If you’re hiring contractors, you’re probably spending too much time on their payroll, contracts, and tax documents. Which is why we built Thera, which saves you 90% the time you spend on contractor paperwork each month.

With Thera, you can compliantly hire your contractors in 150+ countries, onboard them in minutes, and pay them all at once (in a click). It’s global contractor payroll, finally simplified.

Sound interesting? Click here to book a demo.