A lot of us struggle to understand what IR35 means. Can you be a Sole Trader or set up a Limited Company if you only have one contract or one client?
In a nut shell, IR35 started in April 2000 with HM Revenue & Customs are checking to ensure that an individual or company, a contractor or an employer, is not avoiding paying the correct and due National Insurance payment. Called IR35 as that was the number of the original press release announcing the intention to bring in the new rules.
Wikipedia currently defines IR35 as a ‘tax legislation designed to tax “disguised employment” at a rate similar to employment.’ In this context, “disguised employees” means workers who receive payments from a client by way of an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client.
If you are a contractor who trades through a Limited Company you must be aware of IR35 as it could affect your tax efficiency and prevent you from taking dividends.
Whilst this blog can be used to help you determine how compliant your contractual agreement is, it is intended for guidance purposes only and should not be used in place of a professional contract assessment.
There is a great deal of uncertainty regarding IR35, in attempting to determine employment status and there are many factors to consider. If HM Revenue & Customs were to investigate a contract and decide that it is ‘caught’ by IR35 they will calculate a deemed payment, treating all income received as salary and demanding all tax and national insurance contributions on payments originally paid out as dividends.
The interpretation of IR35, and the defining of status, is reliant on case law and as a result, the determining factors surrounding IR35 change over time and certain issues become more prominent following each significant case. To determine whether you are caught by IR35 HM Revenue & Customs will look at both the written contract between your Limited Company and the agency/or client along with your actual working practices, i.e. the way the work is performed on a daily basis. In the event of an IR35 enquiry, whilst your contract will be checked, your working practices will always tend to carry more weight than the written terms themselves. If you have a compliant contract in place it is essential that your actual working arrangements mirror the contracted terms.
A basic questionnaire to know whether you fall within IR35 is as follows:
1. If you were unable to provide the services personally, would your company be able to send a substitute with equivalent skills, qualifications and experience?
2. Have you ever actually provided a substitute?
3. Do you carry out any of the services from your own office?
4. Does your company have to work set hours stipulated by your client?
5. Other than observing client specifications, are you told how to do the work?
6. Do you need to seek permission from your client to take time off?
7. Are you obliged to carry out tasks not covered within the scope of your contract?
8. Does your notice period exceed 30 days?
9. Does your company carry any business insurances?
10. Is your company financially liable to correct any faulty work?
11. Were you ever a permanent employee of your end client?
12. Do you have any line management responsibilities over client staff – appraisals, disciplinary etc?
13. Do you have an ‘office holder’ position within the client’s organisation (director, chairman) with high level managerial responsibilities, such as control over budgets etc?
There are many other factors which would be taken into account when looking at IR35 status, such as, whether or not you provide your own equipment, financial risk, and basis of payment, whether or not you provide your services exclusively, and business-like trading. All of these factors would help HM Revenue & Customs to draw up a ‘hypothetical’ picture of your relationship with the end client, ultimately to establish whether or not you are a disguised employee.
The general idea of IR35 is to stop those who act like and are treated like employees pretending that they aren’t, therefore having the right to all the tax breaks that those working under limited companies receive. This is the core idea behind the term, a ‘disguised employee’.
Contact us with your answers for a quick chat and we can advise as to whether you fall within IR35