IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Introduced in 1999, IR35 is a tax law. It is properly known as the Intermediaries Legislation and came into force in April 2000 as part of the Finance Act.
Why was IR35 introduced?
IR35 was introduced to tackle the problem of ‘disguised employment’. This is where organis-ations engage workers through an intermed-iary, rather than on an employment contract, so they become disguised employees.
This can save the engaging organisation a significant amount of employer’s NICs, and it also means they do not have to offer any employment rights or benefits. It also allows the individual to remunerate themselves using dividend payments saving on personal tax.
A common example is the ‘Friday to Monday’ phenomenon. That is when an employee leaves employment with their employer on a Friday only to return to the same role in the same office on the Monday, only engaged as a contractor or consultant trading through a personal services company. If IR35 does apply, then your business income will be subject to Income tax and National Insurance.
Does IR35 apply to me?
When determining whether IR35 applies, there are three main principles to determine employ-ment status, however significant consideration is required to ensure the correct decision is reached. A wealth of information is available on the HMRC website www.gov.uk/guidance/ir35-find-out-if-it-applies. You will need to consider;
Control – what degree of control does the client have over what, how, when and where the worker completes the work.
Substitution – the contractor should be permitted, as part of the contract, to allow someone else to complete work or parts of work in the contractor’s place.
Mutuality of obligation – the concept where the employer is obliged to offer work, and the worker is obligated to accept it.
Other things to consider are defined provision of services, contract termination, financial risk, payment, exclusivity, equipment and premises, intention.
From 6th April 2017, it is now the role of the public sector hirer to determine the employ-ment status on all contracts and to consider whether IR35 applies or not. This public sector reform is considered a pilot project before the government roll out similar changes in the private sector.
However we must wait until the government publish findings from the ongoing IR35 con-sultation to understand how IR35 will impact the private sector going forward.
We have lightly touched on the topic of IR35 in this article, which we believe will impact more businesses in the future. If you would like to discuss in more detail or how this could impact you please don’t hesitate to get in touch.