IR35 – What is it?
IR35 came into existence in the year 2000 to counter tax avoidance by ‘Personal Service Companies’. These are companies owned by an individual or group of individuals which have been created and structured in a way so as to allow the individuals to provide services to their clients without incurring the same level National Insurance (NI) and Tax liabilities as they would have if directly employed by those clients.
In essence the individuals are removing profits (taking payment) from the Intermediary Companies by taking a Dividend which is not liable to NI contributions whereas if they were directly employed by their client businesses their wage/salary payments would be liable to NI contributions. NI can account for up to 25.8% of Gross Pay so this can be a significant cost!
If you provide a Service to clients through a Limited Company (or other form of Intermediary) then it is possible that you may come under the IR35 Legislation so you should be aware of your obligations.
If IR35 applies all payments to the intermediary from the client are treated as though you were employed directly by the client and are subject the the applicable rates of NI and PAYE. There are sizable penalties and interest accrued on any missed NI and PAYE payments as a result of ignoring IR35 and you are responsible for tax compliance not the client who is employing you!
Am I an Employee or Contractor?
The basis of IR35 is to decide if you are an Employee of the Client Business (hiding behind an intermediary) and subject to PAYE and NI deductions at the prevailing rate or if you are a Contractor running a Limited Company.
It may sound, to you, to be a simply distinction – you are a Limited Company as you have a Company registration and the work is not on a permanent basis. However, with the advent of IR35 you now have to look behind the initial agreement and evaluate against criteria to decide if you are an Employee or Contractor.
The first consideration is regards the control of the work – is it controlled and directed by yourself or are you subject to an Employee/Employer relationship whereby you are under the supervision of the Employer? Some indicators that may indicate you are an Employee are dictated working hours/days or dictated lunch breaks and other requirements regards time spent on the project. Such restrictions should not feature in a Business to Business contract when you are a Contractor but are regularly seen in Employee Contracts.
Another good indicator of IR35 Employee/Contractor status is to ensure you are able to substitute yourself for another to complete the services. If your contract states only you personally can complete the services then you are likely to be classed as an Employee. However if you can send another in your place then it is likely the contract is with the Company and not you personally and as such you would not be subject to IR35 compliance.
Also does the contract allow you to accept work from other clients or are you restricted to one client? If you are restricted to accepting work from only one client or you are on a Client Retainer then it is likely to be viewed that you are an Employee. Alternatively if you work for several clients and their are no restrictions placed on your time then you may be seen as outwith the scope of IR35 (a Contractor).
Are you replacing a permanent worker who was an Employee or were you previously in the same role as an Employee of the Client Company? If this is the case it is a strong indicator that you could be due to adhere to IR35 requirements and be treated as an Employee for tax purposes.
Some other indicators include:
- Who provides equipment?
- Do you have any Staff reporting to you?
- Do you appear on Organisational Charts or Phone Lists?
- Do you have a Security badge for access to Client premises?
- Who benefits from efficiency and loses out on overruns and mistakes?
- Are you paid through the payroll regularly or is payment only on submission of an invoice?
- Are you covered by the Clients insurance or do you hold your own?
There are lots of small indicators and tests that can be applied to determine whether or not you are an Employee or Contractor for IR35 purposes and none of them will give you a certain indicator alone. Instead you have to evaluate a number of different factors and determine if you can argue your status as a Contractor (as opposed to an Employee) based on the results.
If you are unsure you should speak to your Accountant.
What to do when IR35 Applies?
If your business relationship is deemed to be covered by IR35 legislation then you (as the Intermediary) are responsible for ensuring the correct rate of NI and PAYE are applied. Failure to comply with the regulations can result in sizable fines and interest accumulation against any outstanding amounts.
IR35 is a highly complex area and specialist advice is highly recommended the above is only an overview of what is involved. If you are unsure that this applies to you in any way then you should contact your Accountant or Tax Specialist to discuss the matter further.