This piece of tax legislation, named after the Inland Revenue press release which first announced the Government’s plans to clamp down on ‘disguised employment’, was implemented in 2000, and is as controversial today as it was at the turn of the century.
Before IR35 was created, the number of contractors working via their own intermediaries (personal limited companies) was rising at a rapid pace. Limited company owners can enjoy a number of tax benefits which are not available to permanent staff – the main benefit is that no National Insurance Contributions (NICs) are payable on company dividends. Traditional workers have to pay income tax and NICs on their entire salaries.
The Government at the time believed that many limited company professionals were, in fact, ‘disguised employees’, who provided services to their clients in the same fashion as normal employees, and not in the manner of typical ‘self employed’ people who used their own limited companies.
As a result, the Intermediaries Legislation was created to tackle cases of disguised employment. If a person’s contract is deemed to be caught by IR35, the vast majority of their salary will be subject to standard PAYE income tax and NIC rules. The potential tax loss is significant.
You can find out more about the history of IR35 in our timeline.
Do you fall within the IR35 net?
If you are selected for an HMRC IR35 compliance check, both the wording of your contract, and the way you actually carry out the contract (your working practices) will be examined to determine whether you are ’employed’ or ‘self employed’ for tax purposes.
There are a large number of factors to consider when creating the overall picture of a contractor’s employment status. The key question HMRC asks is: would the individual be an employee were it not for the existence of the intermediary (the limited company)?
Some of the main pointers include:
1. Control – is the contractor under the direct control and supervision of the client?
2. Substitution – is the contractor permitted to provide a substitute if they are unable to work?
3. Mutuality of Obligation – is there the expectation of future contract work when the current one expires?
Alongside these, and other factors, the actual way you perform your contract duties should also demonstrate that you are not a ‘disguised employee’.
Find out more about these, and other pointers, in our detailed guide to IR35 compliance.
Clearly, to almost all contractors, particularly first timers, the IR35 rules can seem daunting, however an entire industry has evolved since the year 2000 aimed at protecting contractors from the IR35 trap.
What is the financial cost of IR35?
If your contracts are caught by IR35, the financial consequences are significant. For example, a typical contractor on £350 per day, working 44 weeks per year, could be over £8,000 worse off if caught by IR35.
Try our IR35 calculator and enter your daily rate to find out more.
You can read about the history of the IR35 legislation on our IR35 history page.
The most significant change or addition to the rules since 2000 takes effect from April 2017, when public sector contractors will be subject to the ‘Off Payroll Working’ rules.
Instead of effectively self-certifying your IR35 status, it will now be up to the end-client to determine whether or not your contract is subject to IR35 of not. If it is, then the client will be responsible for deducting any income tax and National Insurance Contributions from your gross pay.
This change has caused great concern within the industry – both for contractors and clients. You can find out about the new IR35 public sector rules here.
How to protect yourself from IR35
If you are considering contracting via an umbrella company, then IR35 is not an issue, as you will pay standard tax and NICs on your income.
If you are a limited company contractor, or thinking of setting up as one, you should take steps to mitigate your risk of being selected for an IR35 investigation.
1. IR35 contract reviews – always have your contracts reviewed by an employment status specialist. They will typically examine both the contract wording and your working practices and let you know if you are likely to be caught by IR35. The specialist may be able to provide changes to the proposed contract, and liaise with your agency to put the changes into practice. Find out more here.
2. IR35 insurance – you can also take out tax investigation insurance which will cover the costs of professional representation in the event of an IR35 compliance enquiry. You can even take out cover to protect yourself against any penalties, or back taxes. IR35 insurance tends to be very competitively priced, and certainly less than £200 per year. You can find out more here.
As a first step, try Qdos, who have offered IR35-related services since the rules were first implemented.