Introduced in 1999, IR35 is tax law legislation, properly know as Intermediaries Legislation. IR35 came into effect in 2000 and set out to combat tax avoidance by contractors supplying their services to clients via intermediaries, such as a limited company. However, there is no legal definition of an employee in law and the emphasis is on HMRC to prove that you are an employee. HMRC term these workers ‘disguised employees’ workers who would otherwise be an employee of the company if not disguising their services by contracting via a limited company.
- The financial impact of IR35 is significant. It can reduce net income by up to 25% in additional tax and NICs.
- To avoid IR35, the terms of any contracts along with the individuals working practises must demonstrate that the person is in business on their own account.
- IR35 affects all contractors who do not meet the ‘self-employed’ status as set out by HMRC.
- In some cases contractors may have a mix of IR35 and non-IR35 turnover
- A number of key ‘factors are used to establish employment status
HMRC assess key factors when establishing whether an assignment falls under IR35 or not. Ensure your contracts include at least one of these three clauses: Control, Substitution, and Mutuality of Obligation, these are the three most important factors.
- Control: The contract will stipulate the level of control. The level of control can take one of three forms. No control; where the contractor determines how the work is carried out (within parameters). Close control; tight supervision of daily activity. Light/medium control; anything in between. As a contractor you are preferably looking for a no/light control clause. It is important as a contractor you retain a certain level of autonomy as employees as typically under the direct supervision of their employer.
- Substitution: The right of substitution enables a contractor to employ another person via the limited company and subcontract the work to another contractor. The right to supply a substitute must be genuine; otherwise this may be deemed a sham by HMRC. Note, the substitute chosen can be refused by the work provider.
- Mutuality of Obligation: No requirement for the contractor to accept the work. No requirement for work provider to allocate work to contractor. No obligation on either party to accept or offer work. A typical trait of self-employed is to be contracted to carry out a specific task with no expectation of further work once said task is complete.
Further actions to consider
Make practical steps and actions to ensure you are IR35 compliant. Remember you are not an employee of the work provider but an employee of your PSC, so don’t be seen as one.
Get your contract reviewed. If you’re unsure, get your contract reviewed to ensure you are IR35 compliant. Protect yourself from an HMRC enquiry.
If you are a legitimate small business, genuine contractor, freelancer, interim or consultant who is in business on your own account, you should have nothing to fear where IR35 is concerned.