What is IR35?
IR35 is a piece of tax legislation, also known as the Intermediaries Legislation, introduced in July 2000, to target disguised employment. It uses a complex set of tests to find out if someone is genuinely in business on their own account or a disguised employee of the client.
In essence, IR35 simply says that if a worker is a disguised employee of the client, then they should be subjected to the same tax and national insurance deductions as other regular employees. IR35 does not, therefore, affect those paying employed levels of tax (such as umbrella workers), but should be considered by individuals working through their own Limited Company and declaring dividends from company profit. At its most basic, if you provide your services to a third party (client) through a limited company (an intermediary) then you should consider IR35 for each and every contract you undertake, including extensions and renewals.
IR35 is concerned with your working relationship, as an individual, with the end client. This includes the contents of any written contracts and the actual working practices.
What does it mean to be inside or outside IR35?
If the relationship is a genuine business to business arrangement and outside IR35, you are free to pay yourself dividends from your company profit. Dividends are not subject to NIC, therefore they are a tax efficient way of extracting income.
To be inside IR35 means that this relationship is effectively one of disguised employment and you will have to pay employed levels of tax and NIC on your income.
The overall result is that being inside IR35 usually costs you a lot more in tax!
How is the tax on your income calculated if a contract is inside IR35?
Where there is income from a project inside IR35 and this income is more than that paid to you as salary (after certain expenses), the additional amount will be deemed to be salary subject to PAYE and NIC.
The limited company will be allowed to deduct certain expenses in respect of IR35 income, specifically:
- A flat rate of 5% of the gross income from relevant engagements
- Company contributions to an approved pension scheme
- Employers NICs
- Expenses deductible as an employee
Why is IR35 so complex?
IR35 is complex because it is really concerned with the terms of an imaginary or hypothetical contract. Because there is no legal definition of employment or self-employment you have to try to understand case law precedent and how this has been interpreted by the courts and HMRC. If you work via an agency it gets even more complicated, as you are unlikely to have seen the contract that the end client has with the agent. Sometimes there are several contracts between you and the end client.
It is possible to undertake multiple projects in a year and be inside IR35 on one project and outside IR35 on another project. It is even possible to provide services to the same client for two different projects and be inside IR35 for one and outside IR35 for the other as the terms and conditions of the contracts and the working arrangements could be different.
The main factors considered when deciding IR35 status are:
- Mutuality of obligations
- Financial Risk
- Provision of Equipment
- Basis of payment
- Personal factors
- Existence of employee rights
- Termination of contract
- Part and Parcel
- Exclusive services
- Mutual intentions
This list is not exhaustive, and case law shows not to treat this as a checklist to run through mechanically. Instead, they are the factors that go towards painting a picture whose overall effect must be evaluated.
Are you an office holder for your client?
IR35 has also been extended to office holders for tax purposes as of 6th April 2013. Where a worker provides their personal services to a client via a limited company to fulfil the duties of an office holder, such as a director or company secretary, the income from those services is subject to tax and NIC as employment income. Simply put, individuals working through a limited company will not be able to operate outside of IR35 when acting as an office holder for their client.
Why should you consider IR35?
Ignoring IR35 could put you at risk. If HMRC successfully challenged your IR35 status they will charge you for any underpaid tax and NIC (employees and employers). They could also charge penalties which start at 100% of the additional tax assessed. If you can demonstrate that you have bothered with IR35 and have taken reasonable care such as having your assignments professionally assessed the penalties can be reduced to zero.
There are other good reasons to consider your IR35 status, but the main one has to be peace of mind.
What are your IR35 responsibilities?
It is your responsibility to assess and confirm your employment status for tax purposes.
We recommend that you have your contracts and working practices reviewed by an independent employment tax specialist at the outset of any projects, when projects are extended or renewed, and every
12 months if your contract has not ended.
Considering IR35 each time you enter into a new arrangement or contract including extensions and renewals is important. You could undertake different contracts in a year and be inside IR35 on one project and outside IR35 on another project. It is even possible to provide services to the same end client for two different projects and come up with one inside IR35 and one outside IR35 as the terms and conditions and the working arrangements could be different
We will ask you to confirm your IR35 status on the projects you undertake in order for us to calculate and prepare your accounts and other statutory returns correctly.
If you do not want to get so deeply involved in the complex subject of IR35, but do want to relax and have peace of mind then you may wish to seek advice from our IR35 specialist firm to help you to decide your IR35 status on each contract you undertake.
Please feel free to call our Support team for further information.JOIN NOW