Facts You Need To Know About IR35
Purpose of IR35
The target of the IR35 legislation is to avoid situations where people leave full-time employment and then returning to the same job immediately or get another assignment as a contractor working through their own Limited company, in order to reduce their tax liability and their NI payments.
IR35 rules affect your tax and National Insurance contributions in a way that the overall rate of tax and NI becomes in line with normal employment taxation.
What is disguised employment?
Disguised employees" means workers who receive payments from a client via an intermediary, for example, permanent employee leaves the job from a company and returns to the same job in the same company to keep doing the same job or role, but as a contractor through their own limited company and overall relationship with their client is similar to when they were employees of the client.
What is an intermediary?
The intermediary can be:
- Your own limited company
- A service or personal service company
- A partnership
What happens if one falls within IR35?
If you work through a contract that is within IR35 you could end up paying out significant amounts of extra tax and National Insurance Contributions, either during the contract or subsequently if you get investigated by HMRC.
Major IR35 factors
It’s best to get your contract review by IR35 specialist for legal reasons as a precautionary measure. Few significant factors to take into accounts while deciding if your contract falls within IR35 or not are as follows, please note this is just a guideline, not an exclusive list
- Control - Do You Have It? How much control you have over the provision of own services
- Substitution – Can you provide a substitute? The absence of a substitution clause won’t necessarily count against you, but including one will definitely help prove to HMRC that you aren’t an employee.
- Mutuality of obligation – How much of obligations can be dictated by each party?
- Financial risks - Are You Vulnerable? What if something goes wrong who picks up the bill you or client’s company
- Working Obligations – Can They Fire You? The fixed notice period is a typical employment case. Similarly, if there is an obligation for you to take on every bit of work that the client offers / gives you then you, or for them to provide you with every bit of work, then it is too much like an employment and IR35 would be applicable.
- Equipment - Do you have to bring your own tools?
- Intentions of the parties – Over all intention of contract matters
- Employee benefits: There will not be any holiday pay, sick pay, pension contributions, training courses, Christmas dinners or the annual staff summer outing entitlement as such if there are you are within IR35. Please remember, HMRC don't just look at the above factors - they review in totality if you are really an employee or a director running a genuine commercial business through your own limited company and activities are available to the general public or every potential client. It doesn't matter if you are working for the same client for one month or thirty years. It's what you do and how you do it i.e. your level of risk, responsibility, liability, and control.
- Training – Who is providing for training, you or your client?
- Multiple clients serving at the same time – Can you have and serve multiple clients at the same time by yourself or through the team?
Does IR35 apply to you?
Please click on two important links as follows if IR35 applies to you or not?
IR35 (intermediaries legislation): find out if it applies to you
Check employment status for tax
What if some activities are within IR35 and others don’t?
Contractor Companies may have a mixture of IR35 and non-IR35 turnover, in which case income outside IR35 contracts will escape these rules.
Safeguarding measures from IR35
One of the options is to join the “The Association of Independent Professionals and the Self Employed (IPSE)”. They offer as standard, IR35 contract templates and support in the event of an investigation.
Do Nothing - many contractors just ignore IR35 hoping it will disappear on its own, will be revoked or believing that it will not apply to them. We would say that is the wrong step to take. IR35 is the law, and all contractors caught by the IR35 rules should make sure to have arrangements in place to meet the increased financial burden. Remember Ignorance of the law is not an excuse.
IR35 contract review service
The best thing to do is seek an independent IR35 review from an IR35 specialist.
HMRC has an extensive section on its IR35 contract review service and the process used by inspectors and the IR35 team in its Employment Status Manual ESM3000 publication.
Contractors unsure about their IR35 status and whether their contract is ‘IR35 friendly’ can call HMRC’s IR35 Helpline and ask for a contract review by the taxman’s Contract Review Service.
The Tax Implications of Getting Caught By IR35
Basically, if HMRC does conclude that you are under IR35 it’s will be painful. The tax implications will be very costly under ‘deemed salary’ which means that any income that you earn/earned from an IR35 applicable contract will now be liable to tax and NIC’s that you might not have budgeted for. Your expenses will also be significantly reduced for that contract because you would no longer qualify for them as normal employees. Worst come worst they will begin looking back in past at all your contracts with the aim of pursuing any and all unpaid tax and contributions where previously you might have just paid yourself in dividends – a very large bill could follow, as well as heavy penalties that they are entitled to levy.
If you are inside/caught by IR35 is there any benefit in trading through my own limited company?
If your contract is in the private sector, you can still claim 5% of your turnover, other expenses such as pension contributions, etc. i.e. normally deemed salary calculations will apply.
If your contract is in the public sector (e.g. locum Doctor), new rules apply from 6th April 2017.
IR35 and public sector changes
IIR35 (intermediaries legislation) if you work for a client through an intermediary you need to check if it applies to you.
The decision of whether IR35 applies to the working arrangement now rests with the public body (i.e. NHS Trust or Health Board) where the work is actually being conducted. It is therefore not up to the intermediary worker to provide evidence of whether IR35 applies, but rather a decision made by the ultimate employer.
Private sector IR35 assessment was transferred to the end-client, with the liability also shifting to the ‘fee-payer’ in the supply chain from April 2021. This measure is being reversed from April 2023