- Intro
Defined by HMRC as ‘off pay-roll working’, IR35 takes its’ name from the original press release by Inland Revenue (now HMRC) when it Introduced the bill in April of 2000. IR35 is a two-part legislation, aimed at curbing tax evasion, by workers and organizations that hire them, using an intermediary or a limited company, also known as a Personal Services Company (PSC). The law wants to ascertain if a contractor is indeed a genuine contractor or a ‘disguised employee’.
- A partnership
- An individual
- Limited company
Why was IR35 introduced?
Working under an umbrella company, or as an employee does not entail the same tax efficiency as working as a contractor. As a contractor you can pay corporation tax at 19% of your profits, pay yourself via dividends and make minimal National Insurance Contributions (NIC), and claim business costs against your tax bill.
Contractors working in the same manner as employees, gain a tax advantage, intentionally or unintentionally compared to others working in the same way. The purpose of IR35 hence is to curb this unfair advantage, for both contractors working as ‘disguised employees’ and corporations that use them to avoid paying income tax and NIC’s.
Are you IR35 compliant?
IR35 requires contractors to interpret a complex set of employment status tests, to determine if their contracts place them ‘Inside (IR35 applies)’ or ‘Outside (IR35 not applicable)’ within the scope of the legislation.
Broadly but not limited to, three sets of principles determine your employment status (whether your contract falls ‘inside’ or ‘outside’ of IR35), also known as ‘tests of employment’;
how much say your client has on the ‘what’, ‘where’, ‘when’, and most importantly ‘how’ of the work you are doing for them. E.g.: The client controls what hours you work, days you can work, and guide you excessively on ‘how’ to go about doing your work. If the case is such then your contract is likely to be deemed as ‘inside IR35’
Do you need to do the task/work yourself or someone else can be sent in your place to do the task? If you have been specifically hired to do the work and cannot send a substitution in your place to perform the work, you are likely ‘inside IR35’
Is the employer obligated to offer you work? And are you under obligation to accept any work offered by the employer? If obligation stands, then you can be deemed to be ‘inside IR35’.
Other elements that can determine the status of your contracts?
- Control:
For a contractor to be deemed ‘outside IR35’, they should have complete operational freedom over their work.
- Equipment:
Owning your tools and equipment you need to carry out services, rather than them being provided by the client can help your status to be ‘outside of IR35’.
- Exclusivity and payment:
Do you have only one client, or do you work for multiple clients? Are you paid on a project basis as a contractor would be? Working for a single client can deem you to be a ‘disguised employee’ and place your contract under IR35.
- Marketing:
Having your website, dedicated office space, and having employees can show your image of being a supplier of services rather than appearing as an ‘employee’.
- Financial Risk:
Are you responsible for any errors made during the contract, do you bear the financial risk of rectification on your own time? If so, you can be considered to fall ‘outside IR35’.
