IR35 is the short name used for the ‘intermediaries legislation’ a 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. Those workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC). It was introduced in 1999, IR35 is a tax law and came into force in April 2000 as part of the Finance Act. Contractors are knowledge workers whose skills and businesses are highly mobile
- If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed.
- There is a strong relationship between these two Contractors and IR35.
- Contractors, freelancers and interims have been steadily increasing in number during the decade since IR35 became law in 2000
- People new to contracting now have access to a wealth of information and resources, such as ContractorCalculator.co.uk and the invaluable Contractors’ handbook.
- The features of IR35 are very prominent to the contractors new in the market to make sure they understand relevant tax legislation.
- For some contractors, IR35 is virtually irrelevant, as they have chosen a trading vehicle that means they already pay income tax and National Insurance Contributions (NICs) as if they are employed, and so the complicated rules and tests of employment do not apply.
- Contractors who are, or are hoping to operate outside IR35 should have their contracts reviewed by a professional.
- It is important for contractors to do necessary amendments and have taken ‘reasonable steps’ to ensure that their contract is outside the IR35 legislation.
- Contractors must focus on these factors to make their contract outside IR35 legislation
- Control: As a contractor, you’ll be expected to have complete autonomy about the way you conduct your assignment. If your client imposes a level of control over you, it’s likely the project will fall within IR35.
- Mutuality of obligation: As a contractor, you should only work with the client on a contract-for-service basis, carrying out a particular task or delivering a set project. Once complete, you can either move on or accept another assignment if one is available. If this happens, you’ll need to negotiate and sign a brand new contract.
- Personal service: This is a particularly important factor, as it’s widely thought of as a “silver bullet” that will place you outside IR35. That’s because if you can prove that personal service doesn’t exist in your project, you’re unlikely to be viewed as a permanent employee by HMRC.
- Realism: It’s important that your contract accurately describes what’s going on with the project. Some contractors have tried to get around the system by developing so-called “IR35 friendly” contracts that don’t reflect the true nature of the project – something that won’t go down too well with HMRC.
- Part and parcel: Remember that a limited company is a business in its own right, so you should be treated as a separate entity to the rest of the client’s workforce. If you take up a position that’s deemed to be business as usual (BAU), you’re likely to be caught by IR35.
- Financial risk: As a business, you’ll be subject to an element of financial risk. If you can demonstrate this to HMRC, you’d be likely to win an IR35 case if one arises.
We at Imperial Advisory offer all clients a free assignment review service that provides guidance on whether a project is likely to fall inside or outside IR35.