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Are you an independent professional, sometimes operating as an intermediary for other businesses? You need to know about the tax regulations that affect your sector, especially IR35. Don’t be dissuaded by the jargon. We’ve explained it all simply, so you can know exactly how such regulations apply to you.
This is your guide to understanding tax Regulations and IR35 for independent professionals.
What is an Independent Professional?
An independent professional is someone who is both highly skilled and self-employed. Therefore, as an independent professional, you are self-employed and rely on your talents, skills, and expertise to earn an income.
The term independent professional usually describes someone in the service sector as opposed to the retail, agricultural, or industrial sectors. It can also be someone who engages in work of an intellectual nature.
You may offer your services directly to clients, or businesses may use you as an independent intermediary between themselves and their clients.
Tax Obligations for Independent Professionals
HM Revenue and Customs, or HMRC, is the UK’s official tax authority. It collects most income taxes from employed people through their employers, via the pay-as-you-earn (PAYE) system. However, this is not the case for people who have no employers.
Self-employed people like independent contractors, freelancers, business owners, and independent professionals pay their income taxes through HMRC’s Self-Assessment system.
Self-Assessment
If you are self-employed or earning an income outside of the PAYE system in the UK, you must register for self-assessment. This means that you are responsible for filing your tax return. HMRC will calculate what you owe based on what you report.
Every year, you will receive a tax bill and a self-assessment statement. You can estimate what your tax obligations will be, based on the previous year’s amount. People who do self-assessment are not required to pay the entire amount at once. It is split into two payments, called payments on account.
Payments on Account for Self-Assessment
The two payments on your account will each be half of what you estimate your tax bill will be. If your actual tax bill amounts to less, you will be refunded. If your payment on account comes to less than your actual bill, you will make what is known as a balancing payment.
This may sound cumbersome, but this system helps self-employed people, including independent professionals stay compliant.
IR35
The line between self-employed and employed can be a bit blurry. If you are an independent professional under contract with a company that is otherwise not your employer, that line gets even more blurry. That’s why you need to know your IR35 status.
IR35 is a tax legislation that ensures self-employed and employed people pay similar levels of tax. Your IR35 status determines whether you’re treated as an employee or contractor for tax purposes. And that means knowing the difference between inside vs outside IR35.
The HMRC looks at the following criteria:
- Do you complete the work personally?
- Do you have control over how, when, and where the work is completed?
- Is the company obligated to offer work to you, and are you obligated to take it (outside of the parameters of the contract?
HMRC may also review the terms of the contract, if possible. Because such situations are often open to interpretation, all cases are reviewed on an individual basis.
Inside vs Outside IR35
If your contract with a client falls inside IR35, the HMRC classifies you as an employee for tax purposes. Your client will be responsible for deducting income tax from your fees, just as an employer would deduct it from your salary.
If your contract with a client falls outside of IR35, you remain solely responsible for paying your income tax. Client contracts where you’re specifically identified as an independent contractor or freelancer, and not an employee, are exempt from IR35 rules.
The distinction between employed and self-employed people seems clear. But as you can see above, it’s possible to be viewed (for tax purposes) as an employee when you are not one.
Confusion on this topic leads to tax reporting errors and even tax defaulting. Don’t be tempted to take advantage of the confusion. Deliberate tax defaulters face penalties and can even be named and shamed.
What About Additional Income?
The Croydon Regeneration project promises to revitalize the area, offering greater opportunities for employment and self-employment. Not only will it create new jobs for employees, but it will also attract new businesses. That’s great news. Most of us appreciate the opportunity for extra income.
But what about people who are employed but earn additional income on the side? People who, although employed, earn additional income independently, need to tell HMRC about it. Check here if you are unsure whether or not this applies to you.
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