Many of those who are new to IT contracting may wonder what IR35 is and how it will affect them. We explain here.

Previously, most contractors, especially IT contractors, generally used limited companies. Their income is paid into there and they extract expenses and salary from it before paying both Corporation Tax and personal tax.

Several years ago, the Government decided that some classes of contractor were really not contractors at all.

What they were really looking at were those people who were permanent on the Friday at a company and the next Monday they had become contract staff.

They felt, probably correctly, that these were disguised employees and that this was just a ruse on the part of the company and the new ‘contractor’ to avoid taxation.

At the IR35 Forum meeting in January 2013, HMRC confirmed that they are scrutinising off-payroll arrangements in the Public Sector and no job titles are to be considered “safe”.

Specific examples of locum solicitors being investigated were discussed during the meeting and it makes commercial sense for HMRC to review higher paid consultants to gain a greater yield of tax. HMRC have targets to meet after all!

IT contractors are also potential targets for HMRC along with other highly skilled professionals.

Is it significant that public sector contractors are subject to scrutiny at the moment?

There is a double whammy for higher paid contractors working in the public sector. Not only will the contractor face a financial penalty if incorrect tax is paid on income generated from the public sector client, but the end client (I.e. the public body engaging the contractor, whether that be the NHS Trust, government department, local council or other publicly funded body) may also face a financial penalty. This certainly helps with HMRC’s targets!