IR35 is legislation, brought in by the Government in April 2000, to counter what HMRC class as a disguised employment.
As a contractor, your ‘IR35 status’ effectively determines your tax position with HMRC, as HMRC stated in the Dragonfly case.
The aim of the legislation is to stop people leaving full time employment then returning to the same job immediately as a contractor. This makes it possible for the previously permanent employee, working through their own limited company, to reduce their tax liability and their NI payments. If a permanent employee were to leave their company on a Friday afternoon then return to the same company on the following Monday in the same job role, HMRC would class this as a disguised employment.
The only way to be sure whether your contract falls inside or outside IR35 is to have it reviewed by a specialist. Brookson is able to offer to all limited company customers as part of our all-inclusive service, an IR35 status review service carried out by Brookson Legal Services at no extra cost.
Prior to the introduction of IR35, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary, resulting in significant tax savings.
The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary, the worker pays tax and NICs on a basis broadly equal to that an employee of the client would pay.
As a director, it is your responsibility to ensure that your IR35 status is always clear. If you take dividends in the absence of careful consideration of your IR35 position you are putting your company and yourself at risk.
As employment status and IR35 is so important, in this section we look in more detail at several elements, the reasoning behind Engaging as Employee or Contractor, Brookson Legal Services IR35 Status Review process and some Job Specific IR35 Considerations.
We consider the value of a Separate Contract for Each Project; provide guidance on Contract Negotiations, Contract Clauses and the implications of Not Signing a Contract. This is supported by some IR35 Case Law examples that have had a real impact on IR35 and employment status.
IR35 is still relevant if you work through an employment agency, so we also outline Agency Conduct Regulations and IR35 issues.
Being caught or ‘inside’ IR35
If your contract has the same level of risk, responsibility, liability and control as a permanent employee then you would be classed as inside or caught by IR35 legislation. This means you should pay full tax and full National Insurance (instead of the usual salary and dividends from the profits of your company) and have reduced entitlement to expense claims. This is because HMRC believes that as you aren't taking the financial risks or have the same level of control as a director of your own limited company, you aren't entitled to the same corporate tax structure.
If you are inside/caught by IR35 there may still be benefits in trading through your own limited company. There is a deduction for 5% of your turnover, you also benefit from the VAT flat rate scheme (potentially saving around £2,000 a year) and receive interest on the funds held within your own company. So from a financial point of view it could be worthwhile. Any other contract work you do could also be put through your existing company.
Following changes in legislation, from April 2016, you are no longer allowed to claim travel and subsistence costs as a deduction when your IR 35 payroll is calculated.
IR35 regulations are extremely complex but the points covered below provide a rough indicator of how you can consider your IR35 status and remain ‘outside’ IR35.
Control: Ensure you are free to work under your own control and not managed by your client.
Financial risk: Working through your own limited company you are taking an element of financial risk. You should be responsible for providing all of your own equipment, hiring individuals to assist and any other financial requirements in satisfaction of your contractual obligations. HMRC will look at all of these when considering whether you take a genuine financial risk.
Substitution: Place a clause in your contract allowing you to use somebody other than yourself to perform the task your company has been contracted to do.
Provision of equipment: Use your own equipment. It is accepted that sometimes this is very difficult and allowances are made where, for example, security measures prohibit the use of personal computing equipment.
Right of dismissal: There should be provision in your contract for immediate termination, rather than a fixed notice period as with employees, should the client choose to do so.
Employee benefits: You should not receive any holiday pay, sick pay, pension contributions, training courses, Christmas dinners or join the annual staff summer outing of a clients business.
Please be aware that HMRC won’t just look at the above. They review all aspects of your business to establish you are a director genuinely running, managing and controlling your own limited company rather than an employee. It doesn't matter if you are working for the same client for one month or much longer periods, it’s what you're doing and your level of risk, responsibility, liability and control that count.
We also have a free guide to IR35 that you can download if you would like to read further.