What is IR35?
If you’re not directly employed by your client in a traditional sense, but you use an intermediary (such as a Limited Company) to provide your services, the intermediaries’ legislation – known as ‘IR35’ – may apply to you.
Under IR35, you have the burden of proving that you’re not using your Limited Company to disguise what is, in reality, an employment relationship with your client.
Why was IR35 introduced?
The amount of tax you pay depends on whether you’re working for your client via a Limited Company or as an employee.
In order to enjoy the tax benefits of working as a contractor, some employees disguise themselves as a Personal Service Company. This way, they can divide their Income Tax and National Insurance Contributions between a salary and dividends – resulting in a higher take-home pay than a regular employee.
So, by introducing IR35 in 2000, HMRC wanted to ensure that people were being taxed according to their true circumstances. In essence, IR35 determines if you’re:
a) A Limited Company contractor; or
b) An employee.
As a Limited Company, you shoulder complete responsibility for paying the right amount of tax.
Are you a contractor or an employee?
When your client engages you to provide them with services through your Limited Company, you need to work out if you’ve simply replaced a previous employee.
If so, the chances are that your contract is caught by IR35 because your Limited Company is, for all intents and purposes, masking your duties as an employee.
What does an ‘IR35-friendly’ contract look like?
The main feature of an ‘IR35-friendly’ contract (one that is outside IR35) is that you control and direct your work.
So, whether you draft your contract yourself or have it prepared by an IR35 specialist, it should include the following clauses to ensure that it isn’t caught by IR35:
- Control and supervision: you should be in charge of your working situation, such as start and finish times, lunch breaks, etc.
- Substitution: you should be able to draft in a third party to perform services for the client on your behalf.
- Payment: you must invoice your clients in order to receive payment (rather than being paid automatically through a payroll system).
- Exclusivity: your contract shouldn’t prevent you from working with other clients.
- Liability and insurance: as an independent contractor, you’ll be liable if your work isn’t up to scratch and doesn’t meet your client’s expectations.
What is an agency?
An agency is any third party interposed between the worker and the client for whom they provide the services. The agency does not have to place the worker with the client for the legislation to apply.
- Agency workers are subject to PAYE and NICs on their earnings.
- Employment intermediaries have specific reporting instructions from April 2015.
Recent changes to these rules make it difficult for agencies and other employment intermediaries to pay workers gross, i.e. treating workers as being self employed in their own right.
- From April 2015 there are new reporting obligations for agencies and employment intermediaries who pay workers gross.
- From April 2014 the rules for determining employment status changed in respect of workers supplied through agencies or other intermediaries.
The agency rules will not normally affect workers who provide their services via their own Personal Service Company (PSC), although IR35 will continue to apply
Public sector engagements
From 6 April 2017:
- Workers providing their personal services either personally or via a Personal Service Company (PSC) to a public sector body are taxed as if they are employees.
- The worker's company is no longer required to apply IR35.
- The public authority or agency is responsible for assessing the worker's employment status.
Autumn Budget 2018 announcements:From 6 April 2020
- The government confirms that it is extending Off-payroll working in the public sector to private sector.
- The change will only apply to engagements by medium or large end clients.
- A consultation on the new rules has been published and closes on the 28 May 2019.
How can you find out your IR35 status?
If you’d like an IR35 assessment, contact us today to arrange a review of your circumstances.
Contact SIL Solutions (Tax advisers with a difference)
Tel: 0207 993 5016
Or just click to complete the form.