IR35

In April 2000 HMRC introduced a piece of tax legislation called IR35.

IR35 was introduced because the Government believed that some contractors were providing their services through a Limited Company (Personal Service Company) as a means of avoiding tax and National Insurance Contributions (NICs).

Before IR35, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through a limited company. The contractor could take the money out of the of Personal Service Company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.

The legislation seeks to determine what the relationship would be between the contractor and the end client if it had not been for the intermediary Personal Service Company. If the relationship would have been one of employment, the contractor is deemed to be 'inside' IR35 and would pay tax and NICs on a basis which is fair in relation to what an employee of the client would pay. If the relationship would be a contract for services (self employment) then the contractor would fall outside IR35.

Although IR35 affects all contractors working in the UK, it is the terms and conditions specified in your contract that forms a major part in determining whether you are affected or not. IR35 applies to each contract and not to you as an individual. So the issue is whether each individual contract you enter into is caught by IR35.  It is feasible to have income from two different contracts at the same time, one being caught and the other not.

Contractors ‘caught' by IR35 will be taxed as an employee and as such pay significantly more tax than a contractor who falls outside of IR35.

IR35 employment test

The tests that HMRC uses to determine whether you are caught by IR35 are complex.

In simple terms, you are likely to be caught by IR35 if:

• Your work is under the complete direction and control of your client
• You take no financial risk in accepting the work
• You do not act as though you were in business on your own account
• You are obliged to accept work when it is offered
• Your contract specifies you as the worker and you are unable to substitute etc
  

How we can help

We provide accountancy services exclusively to the contracting market, helping thousands of clients within various industries such as IT, engineering, teaching, driving and the public sector.

Before you sign any contract we recommend you to call or email our team to receive a FREE, no obligation consultation.

• We talk you through any contractual issues you may have and explain the best trading options for you
• We'll advise on how you would have to operate in the future in order to guarantee not being caught by IR35
• We'll suggest ways of structuring your affairs - even if you fail IR35 - in the most tax efficient manner within the regime to maximise your net income

All you need to do is complete our online enquiry form or call us on 0845 0511 902 and we can explain it all to you.