What is IR35? That is a burning question which we often hear. This seemingly complex piece of legislation can have a substantial impact on the life of a contractor. Here’s our guide to give you the technical answers to that all important question, what is IR35?
The Intermediaries legislation, commonly referred to as ‘IR35’, was introduced in April 2000. The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as own limited companies or partnerships, 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 and paying Class 1 NIC on payments for services by providing those services through an intermediary. The worker could take the money out of the intermediary, normally their own limited company, in the form of dividends instead of salary.
The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.
On 6 April 2007 Chapter 9 ITEPA 2003, more commonly known as the Managed Service Company (“MSC”) Legislation, was introduced. The MSC Legislation applies to individuals providing their services through intermediaries which meet the definition of a Managed Service Company.
An intermediary must consider whether the MSC Legislation applies before considering IR35. Intermediaries that do not meet the definition of an MSC must continue to consider IR35.
The circumstances in which the legislation applies
If you provide your services to a client (the end-user) via an intermediary, typically a service company or partnership, and the intermediary does not meet the definition of a Managed Service Company, then the IR35 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; 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 and/or, for NICs purposes, as employed in employed earner’s employment by the client.
In addition you must receive or have rights entitling you to receive a payment or benefit that is not employment income.
It is therefore necessary under the legislation to construct a hypothetical contract between the worker 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 the other conditions, if that hypothetical contract would be one of service then the engagement is within the legislation.
The existing employment status tests are used to decide whether the hypothetical contract between the worker and the client would be a contract of service / employment. The courts lay down the criteria used to decide who is an employee.
Would I have been an employee of my client?
The IR35 rules only apply if you would have been an employee of your client, had it not been for the existence of your own limited company or partnership.
If you can answer 'yes' to most of the following questions, you would probably have been an employee of your client for the contract in question and therefore within the new rules:
- Do you work set hours, or a given number of hours a week or a month?
- Do you have to do the work yourself rather than hire someone else to do the work for you?
- Can someone tell you at any time what to do, when to work or how to do the work?
- Are you paid by the hour, week or month?
- Can you get overtime pay?
- Do you work at the premises of the person you work for, or at a place or places he or she decides?
- Do you generally work for one client at a time, rather than having a number of contracts?
- Can you make a loss on the contract?
If you can answer 'yes' to most of the following questions, you would probably not have been an employee of your client and therefore outside the new rules:
- Do you have the final say in how you do the work for the client?
- Are you free to hire other people on your own terms to do the work you have taken on?
- If you are free to hire other people on your own terms, 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 clients at the same time?
- Do you have to provide the main items of equipment you need to do the job for the client, not just the small tools many employees provide for themselves?
You will have to think about each assignment individually. Some people will find that they have some assignments, which would have been employment and so come within the rules, and others which do not.
Historically you have assessed your IR35 status however from the 6th April 2017 if you are working in the Public Sector then the End Client is responsible for this assessment and if they have deemed the assignment to be caught then the entity paying your Personal Service Company will be responsible for deducting and paying HMRC, PAYE and National Insurance before payments are made.
If you are a long term contractor and outside IR35, your own limited company might be right for you. Our affiliate Method Accounting may be able to help you with your own company.
Speak to us for a no obligation discussion about your personal circumstances.