What is IR35?
IR35 is a piece of tax legislation, also known as the Intermediaries Legislation, introduced in April 2000, to target disguised employment. It uses a complex set of tests derived from case law to find out if someone is genuinely in business on their own account or a ‘disguised employee’ of the end client.
In essence, IR35 simply says that if a worker is a disguised employee of the client, then they should be subjected to the same tax and national insurance deductions as other regular employees. IR35 does not, therefore, affect those paying employed levels of tax (such as umbrella workers), but should be considered by individuals working through their own limited company and declaring dividends from company profit. At its most basic, if you provide your services to a third party (client) through a limited company (an intermediary) then you should consider IR35 for each and every contract you undertake, including extensions and renewals.
IR35 is concerned with your working relationship, as an individual, with the end client. This includes the contents of any written contracts and the actual working practices.
What does it mean to be inside or outside IR35?
If the relationship is a genuine business to business arrangement and outside IR35, you are free to pay yourself dividends from your company profit. Dividends are not subject to NIC, therefore they are a tax-efficient way of extracting income.
To be inside IR35 means that this relationship is effectively one of disguised employment and you will have to pay employed levels of tax and NIC on your income.
Following the introduction of reforms to off-payroll working in 2017 and 2021, contractors working through their own limited company for an end client in the public sector or a medium or large end hirer in the private sector, it became the responsibility of the end hirer to determine the IR35 status of each assignment. Invoice payments Assignments found to be inside IR35 will
How is the tax on your income calculated if a contract is inside IR35?
This will depend on who is responsible for determining the IR35 status of the assignment. Where this sits with the end hirer, the ‘fee payer’, the entity that makes payment to your limited company, will need to make PAYE deductions of tax and national insurance on the income from the assignment, before paying your company the net amount (plus any VAT). Where the responsibility remains with you, as it would be if your engagement is with a small company, you will be paid gross and will bear responsibility for calculating your deemed salary.
Where the contractor retains responsibility for administering the IR35 rules, you will be allowed to deduct certain expenses in respect of IR35 income, specifically:
- A flat rate of 5% of the gross income from relevant engagements to cover business expenses
- Company contributions to an approved pension scheme
- Employers NICs
- Expenses deductible as an employee
Why is IR35 so complex?
IR35 is complex because it is really concerned with the terms of an imaginary or hypothetical contract. Because there is no legal definition of employment or self-employment you have to try to understand case law precedent and how this has been interpreted by the courts and HMRC. If you work via an agency it gets even more complicated, as you are unlikely to have seen the contract that the end client has with the agent. Sometimes there are several contracts between you and the end client.
It is possible to undertake multiple projects in a year and be inside IR35 on one project and outside IR35 on another project. It is even possible to provide services to the same client for two different projects and be inside IR35 for one and outside IR35 for the other as the terms and conditions of the contracts and the working arrangements could be different.
From April 2021, it is the responsibility of the end-hirer to decide whether you are inside, or outside of IR35. The main factors they or you must consider when deciding the IR35 status of the assignment are:
- Mutuality of obligations
- Financial Risk
- Provision of Equipment
- Basis of payment
- Personal factors
- Existence of employee rights
- Termination of contract
- Part and Parcel
- Exclusive services
- Mutual intentions
This list is not exhaustive, and case law shows not to treat this as a checklist to run through mechanically. Instead, they are the factors that go towards painting a picture whose overall effect must be evaluated.
Please be aware, small businesses are exempt from these IR35 reforms, meaning that the responsibility of determining IR35 status in this scenario is still with the contractor.
Are you an office holder for your client?
IR35 has also been extended to office holders for tax purposes as of 6th April 2013. Where a worker provides their personal services to a client via a limited company to fulfil the duties of an office holder, such as a director or company secretary, the income from those services is subject to tax and NIC as employment income. Simply put, individuals working through a limited company will not be able to operate outside of IR35 when acting as an office holder for their client.
Why is it important to consider IR35?
Ignoring IR35 could put you and your end hirer at risk. If HMRC successfully challenged your IR35 status they will charge the responsible party, i.e. you or your end-hirer for any underpaid tax and NIC (employees and employers). They could also charge penalties which start at 100% of the additional tax assessed. If your end hirer can demonstrate that they have taken reasonable care and have had your IR35 status professionally assessed the penalties can be reduced to zero.
There are other good reasons to consider your IR35 status, but the main one has to be peace of mind.JOIN NOW