When you incorporate a company then there are several factors that affect it and there are numerous factors that come into play. One such major factor is tax liability. A company has to pay a lot of tax and because of this most of the companies avoid paying taxes due to some or the other reasons. It is necessary that one understands how this machinery works in order to get tax benefits so that a company doesn't have to bear the burden of heavy tax payment all the time. One such tax liability is IR35 which is a term associated with United Kingdom tax legislation. It is a tax liability which is designed to tax "disguised employment" which is somehow similar to normal employment. A disguised employee is an employee who receives payments from a client via an intermediary. However the fact is that the relationship of the employee with the client is such as if the payment would have been made directly then that disguised employee would have been an employee of that client. Therefore in order to stop this thing the concept of IR35 was brought.
Earlier people who used to own small companies use to divide the earnings amongst the members of the family so that the individual income would remain in the lower tax bands. Such companies were known as personal service companies which used to avoid tax liability. Thus a change in legislation was made and the concept of IR35 was introduced. However the concept of IR35 has been criticized on many grounds. People feel that such legislation has a harmful impact on many small companies which exist for reasons other than tax avoidance. The legislation of IR35 mostly affects the contractors. Thus it is very important for the contractors to understand this concept and properly manage the problem of IR35.
For contractors it is necessary that they wait for the perfect time when they can address the problem of IR35. There are many contractors who wait until they have signed a contract. However it is not the right way. One needs to address the problem of IR35 tax liability much before. First of all it is necessary to know that contractors are no more considered as self employed. Thus their IR35 status depends on their contract. SO contractors who have not taken proper steps to avoid IR35 can easily get caught under the liability of IR35. Thus one must properly address the problem of IR35 much before incorporating a business otherwise he/she will land up in paying huge amount of taxes under IR35.
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