“IR35” is a piece of tax legislation announced in 1999, which took effect from April 2000.
Why did the government introduce IR35?
HMRC’s intention was to tackle tax and National Insurance (NIC) avoidance schemes through the use of intermediaries, such as Partnerships or Personal Services Companies (PSC).
What IR35 means?
IR35 is a way of determining your employment status and, in turn, how much tax you must pay.
A contractors IR35 status is determined on an assignment by assignment basis so it is important that you complete an IR35 audit each time you undertake a new contract.
Being found to be inside IR35 does not mean that you cannot work through a limited company. It just means for the particular assignment that your status was found to be captured, you will have to pay yourself PAYE.
IR 35 Rules?
Broadly speaking, the following elements determine IR35 status.
Your contract should make the following points very clear, so there can be no misunderstandings.
- Control and Supervision
Although a contractor would usually be expected to provide services during certain times at a specific location, the contract must make it clear that the client does not control the way in which the services are provided. That’s a key difference between client-supplier and employee-employer.
As a Director of your own business you will need to be able to demonstrate to HMRC that you are not influenced by your end client and that you are in sole charge of your business. You must be able to demonstrate that there is not un-due control exerted over you and your company whilst you are carrying out the assignment.
- Mutuality of Obligations
This point has caused untold confusion in the contractor world. But at its essence it’s quite simple. Does the contract oblige the client to offer ongoing contract work, and/or does it oblige you to accept it? If either answer is no, then this shows the relationship between the two parties is not that of an employee and employer.
- Unfettered Right of Substitution
This is a way to differentiate between agreement with an individual employee and a genuine contractor. If the contract states that a substitute can be provided in place if required with the required skills, experience or qualifications.
Here are some of tests HMRC may use to ascertain if someone is a genuine contractor:
- Does the contractor use their computer or tools, or do they use the client’s equipment (this
is a grey area, as the cost of equipment, and its maintenance may be factors)?
- Does the contractor have a designated parking space, or are they a ‘visitor’?
- Does the contractor wear a company uniform or badge, or are they clearly independent?
- Does the contractor appear on the company organisation chart, website or phone lists?
- Does the contractor have client business cards in their name?
- Does the contractor attend group training aimed a team-building or similar activities?
- Does the contractor enjoy employees benefits such as a subsidised canteen or gym
Any of these things could be interpreted to mean the contractor is really a disguised employee.
HMRC may look at the structure of your business for signs that it is a legitimate entity:
- Does it have a business name?
- Do you have a business bank account?
- Is your company registered at companies house?
- Is the company register for VAT? and registered address? Is the company registered for VAT?
Length of Engagement
Although not conclusive, the length of engagements can indicate whether a person is treated as employed or self employed.
For example, if you work for one client solely for many years, then this can be indicative of being an employee. By way if contract, working for a series of clients for short periods of time would be a sign of a genuine contractor.
Intention of the Parties
It is not enough for the contractor to call themselves self-employed. It must be clear that both the client and the contractor understand the terms of the agreement, that the client perceives the contractor to be self-employed and not part if their existing workforce. This can usually be made clear in the contract.
If you stand to lose money as a result of providing services then this can be indicative of self-employment. You may need to buy assets or equipment to do the job. You may incur other expenses such as for training.
If you have to resolve errors made when providing your services in your own time without being paid then this is a sign of self employment.