IR35 Overview and Advice
The Intermediaries legislation was introduced on 6th April 2000, and is now commonly referred to as ‘IR35’.
The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as a personal service company (a one-man limited company) or partnership, in circumstances where an individual worker would otherwise:
- for tax purposes, be regarded as an employee of the client; and
- for NICs purposes, be regarded as employed in employed earner’s employment by the client.
Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services, and paying Class 1 NIC by providing those services through a personal service company (PSC). The consultant could take the money out of the PSC, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. Also PAYE tax would not apply to the dividends.
The IR35 legislation ensures that, if the relationship between the consultant and the end-client would have been one of employment had it not been for the PSC, the consultant pays broadly tax and NICs on a basis, which is fair in relation to what an employee of the client would pay.
The Circumstances in which the Legislation Applies
If you provide your services to an end-client via a PSC, then this legislation may apply to engagements with that client.
Broadly, it applies to those engagements where:
- you personally perform services for another person (the client);
- the services are provided not directly with the client but under arrangements involving an intermediary (recruitment business); and
- the circumstances are such that, if you had provided the services directly to the client under a contract between you and the client, you would have been regarded for income tax purposes as an employee of the client.
To decide whether a PSC falls within the legislation it is necessary to construct a contract between the consultant and the client based on all the circumstances, including the terms and conditions of relevant contracts and the actual substance of the arrangements between the parties. Subject to meeting certain other conditions, if that contract would be one of service then the engagement is within the legislation. Existing employment status tests are used to decide whether the contract between the consultant and the client would be a contract OF service (employment (within IR35)) or FOR service (service agreement with Ltd company) outside IR35)). More information on the criteria used can be found at www.hmrc.gov.uk/employment-status.
Consequences of Ignoring the Legislation
The Inland Revenue does monitor compliance. Where they find that the incorrect classification has been applied in respect of a particular engagement, they will ensure that the situation is corrected for the past and, where appropriate, for the future. Be aware that interest and penalties may be charged on any additional tax/NICs due as a result of any review or enquiry.
Does the IR35 Apply to Me?
The IR35 rules only apply if you would have been an employee of your client, had it not been for the existence of your company or partnership. If you can answer ‘yes’ to the following questions, you would probably have been an employee of your client for the contract in question.
- Do you work set hours, or a given number of hours a week or a month?
- Do you do the work yourself rather than hire someone else to do it for you?
- Can someone tell you at any time what, when, or how to do the work?
- Are you paid by the hour, week, or month?
- Are you entitled to overtime pay?
- Do you work at the premises of the client, or at a place or places it designates?
- Do you generally work for one client at a time, rather than having a number of contracts?
If you can answer ‘yes’ to the following questions, you would probably not have been an employee of the client, and therefore outside IR35.
- Do you have the final say in how you do the work for the client?
- Can you make a loss on the contract?
- Do you provide the main items of equipment you need to do the job for the client?
- Are you free to hire other people on your own terms to do the work you have taken on?
- Do you pay them out of your own pocket?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
- Do you have a number of customers at the same time?
You will have to think about each contract individually. Some people will find that they have some contracts, which would have been employment and so come within the rules, and others which do not.
This is only intended as a brief guide. Click here for IR35 guidance or for more information visit HMRC. If you think you could be at risk or require further assistance please contact the HMRC or seek professional advice. We strongly suggest that you get professional advice before making any decisions regarding your IR35 status.
For further information on IR35 and UK tax law and practice, you should
visit the following website: www.inlandrevenue.gov.uk/ir35/