What is IR35?
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’.
An intermediary would typically be a worker’s own personal services company, but can also be;
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’
Mutuality of Obligation