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Our free guide explains what IR35 is, outlining the rules and legislation and how it will affect you.
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What Is IR35?
IR35 is the industry name given to laws set out in the Finance Act 2000. The legislation is intended to prevent individuals from avoiding tax by ‘disguised employment’ - working as self-employed contractors through their own limited company even though they do the same job as an employee.
If HMRC decides that your contract puts you within IR35, you’ll have to pay tax and National Insurance like an employee, rather than taking your director’s fee and dividends. So it’s important to make sure you’re entitled to every penny you take from your company.
For example, an IT technician might leave their permanent job on the Friday, only to return on the following Monday as a contractor, performing exactly the same job in the same was as they did before but working via a limited company intermediary.
If the relationship between the worker and the client would be classed as employment if there was no intermediary, the IR35 rules make sure that the worker pays similar income tax and National Insurance Contributions to conventional employees.
For more information, download our FREE guide to IR35.
How Brookson can help?
Brookson offer FREE and unlimited IR35 Compliance reviews as part of our all-inclusive Limited Company Service, with a refresher review every six months to give you complete peace of mind. An IR35 review will help you to ensure that you comply with your tax and NI obligations while working on longer term assignments. Your IR35 status depends on the following two elements, Brookson review BOTH as part of our review process:
- The terms of your contract
- Your working practises
IR35 frequently asked questions
What is “IR35”?
IR35 is the industry name for legislation originally contained in Schedule 12 of the Finance Act 2000. This legislation, also known as “the Intermediaries legislation” states that if you are treated as a disguised employee of the agency or client, your income on that assignment should be taxed as an employed earner (i.e. subject to income tax and national insurance contributions).
Is there a legal definition of an “Employee” or an “Independent Contractor”?
No, there is no statutory definition of either an “employee” or “independent contractor”. Case law, established by the courts over previous years, is used to determine whether someone is treated as an employee (engaged under a contract of employment) or a self employed, independent contractor (engaged under a contract for services).
How can I avoid IR35
There is no way around IR35 if you work through a limited company and draw dividends from the company’s profits. However, there are ways of ensuring compliance with IR35 and this is something which Brookson Legal Services Limited is on hand to assist you with, as part of our all-inclusive limited company service.
What changes have been introduced to IR35 in the Public Sector?
As of 6th April 2017 the responsibility for determining a worker’s IR35 status, when providing services in to the public sector, lies with the end hirer, not with the worker themselves.
How do I get this right from the beginning?
Brookson limited company customers benefit from unlimited IR35 reviews via Brookson Legal Services, to ensure that you comply with your tax and NI obligations, whist working on assignments as a limited company contractor.
Brookson Legal Services use the same employment status tests employed by HMRC., which are designed to assist in establishing whether your working practices support you being an independent contractor, or whether you are being treated by your client as a disguised employee.
The initial review is available to customers when they first start a project or assignment. A refresher review is available to customers when they have been on a project or assignment for 6 months or more to ensure that working practices continue to support you taking dividend income from the assignment with your client.
How is an “Assignment” defined?
An assignment is a fixed project or body of work which you undertake with a client.
Ideally each Assignment you undertake should be for a specific body of work or for a fixed period of time as opposed to a rolling contract. This is because “rolling contracts” suggest that you are at the beck and call of the client which means that you are more likely to be captured by IR35.
How long should a my notice period be?
A short notice period (or no notice period at all) can indicate that your company carries some financial risk in the contract. This is because there is a risk of losing the assignment with little warning. This is the opposite of how an employee would be treated as employees are more likely to have a lengthy notice period to terminate their employment. Therefore, a short notice period will help you to demonstrate that you are not treated as a disguised employee of your client.
I have not received a contract for the assignment I am working on and I am now working my notice, do I still need a contract?
Even though notice has been served and the contract is due to come to an end, services have been provided under a contract and so it is still important to obtain a written document which demonstrates your independence from the client.
How long does an IR35 review take?
As part of Brookson’s all-inclusive limited company service, Brookson Legal Services Limited reviews all documents within 5 working days of receipt. If the review reveals queries which Brookson Legal Services Limited would like to discuss with you, they will telephone you to clarify the queries as quickly as possible.
What would happen if I am investigated, how do Brookson help?
If you have had a full IR35 Review with Brookson Legal Services Limited, we will have to hand all of the information required for the investigation with HMRC. Whilst we may look to clarify some elements of the assignment and we will be in contact with you throughout to ensure you are kept up to date, we will deal with HMRC’s queries directly on your behalf and at no extra cost to you.
If you have not had a full IR35 Review with Brookson Legal Services Limited, we will be happy to liaise with HMRC on your behalf, but we are likely to require more information from you in order to do so. There may also be additional fees for undertaking this work and they will be agreed on a case by case basis depending on the number of assignments undertaken during the period under investigation and the anticipated volume of work involved.
I am working on various projects and have a contract which is reviewed annually; do I need to do anything to protect my IR35 status?
Ideally, you should have a contract for each project or body of work you undertake. Quote a fixed fee per project if possible and ensure that you obtain a contract for any other work you undertake for the client.
Project based contracts are significantly better than period based contracts.
What are the advantages of getting an end date for the project I am working on?
When considering this matter from an IR35 perspective, it is important that we first consider the purpose behind not putting an end date on the contract. Usually, the end date is left open where you are not engaged for a specific project. In which case, you will be engaged on an "ongoing" basis, usually to fill a gap in the client's workforce whilst it navigates a particularly busy period or tries to recruit a permanent employee with the necessary skills and qualifications. In these cases, you are likely to struggle to defend an IR35 challenge on the basis that you have been brought in to carry out the function of an employee for the client.
Therefore, a lack of an end date on the contract may be of little help to you from an IR35 perspective and will generally raise more questions than it answers.
Conversely, where you are engaged on fixed projects or fixed bodies of work, you are in a far better position to defend an IR35 challenge than those contractors who are engaged for a period of time. Where the project has an estimated or fixed completion date, this should be noted on the contract even if it is referred to as an "estimated" completion date. The date can be extended should the project run over so the end date need not act as a guillotine to the assignment.
This will indicate that you have been engaged for a specific period/body of work and once that work is complete the relationship comes to an end. Any further work will require another contract to be issued.
The end date will therefore go some way to demonstrating that there is no mutuality of obligations between you and your End Client as there is no obligation to provide further work when the contract comes to an end as it was envisaged at the outset that the relationship would cease when the project was finished.
Finally, it is important to retain some perspective on this issue. Having an end date may provide some assistance to you in defending an IR35 challenge, but it won’t win the case on its own. It is essential that all other features of the relationship between you and your End Client are consistent with that of a self-employed relationship as opposed to employer/employee. HMRC will consider issues such as control, substitution, being in business of your own account, financial risk, integration and the ability to profit from your own sound management as well as mutuality of obligations as discussed above.
Is there a difference between the different IR35 tests “IR35 Indicators”, “badges of trade” or “employment tests”?
No – they are just different ways of referring to the tests which have been established by the courts to determine whether you are engaged under a contract of service (i.e. a contract of employment) or a contract for services (i.e. a self employed contract).
What are the employment tests which have been established by the courts?
There have been several tests which are used to establish whether someone is engaged as an employee, some of which are as follows:
Can you provide a substitute?
Are you subject to the client’s direction, supervision or control?
Is there a mutuality of obligations between you and your client?
Do you bear any financial risk?
Do you invest in your own business?
Do you provide your own equipment and training?
Is your income subject to tax and national insurance at source from your client?
Do you receive holiday/sick/maternity pay from your client?
I have been with my client for almost 2 years; does this mean that I will be caught by IR35?
The two year rule from the expenses guidelines is often confused with the IR35 legislation. Following legislative changes, however, from April 2016, you will not be entitled to tax relief and NIC relief on travel and subsistence costs incurred for home to workplace travel.
The length of your engagement with the client will not, on its own, mean that you are captured by IR35. Therefore, just because you have been engaged with a client for a period of 1, 2, or 5 years will not automatically mean that you are caught by IR35.
However, the longer you are engaged with a client, the harder you have to work to demonstrate your independence. Over time, you may become integrated into the client’s business which will weaken any argument that you are an independent contractor.
I had an IR35 review at the start of my assignment with the client over 6 months ago, do I need another review?
Yes, ideally you should have a review of your working practices at least every 6 months even though you may think nothing has changed.
Having 6 monthly reviews will enable you to ensure that your working practices accurately reflect the contract which you agreed at the outset of your assignment. It is essential that your working practices continue to reflect that you are an independent contractor and that you are not being treated as just an extension of your client’s workforce.
I work for multiple clients at any one time. Do I still need to have an IR35 review?
It is recommended that you have a review for each client you work for to ensure that you remain compliant with IR35 on each assignment.
My contract is for a fixed period which has now expired but I am still working for the client. Should I get a new contract?
Yes, you should obtain a contract to cover the additional period and ensure that it accurately reflects the project/body of work you are working on.
Is there any benefit in working through my own limited company if I am inside/caught by IR35?
Yes, definitely. IR35 is assessed on each contract/assignment which the company undertakes. You can be caught to by IR35 on one assignment and no captured by IR35 on another.
Even when you are caught by IR35, you can still benefit from being in the flat-rate VAT scheme and claim business expenses.
What does it mean if I am “captured by IR35”?
If an IR35 review concludes that your Contract Terms and Conditions support your status as a self-employed independent contractor, there is no further action required at this point. However you will need to undertake a new IR35 review either in 6 months time (if you are still on the same assignment) or when you change assignments, whichever is sooner.
Brookson Legal services refer to this outcome as “Taxed as Self employed” to make it clear that you are only required to pay corporation tax on your dividends.
What does it mean if the outcome of my IR35 review is Caution?
This is where your working practices appear to support a self-employed status but your Contract Terms and Conditions do not.
As part of Brookson’s all-inclusive limited company service, Brookson Legal Services will identify the issues in your Contract and we will contact you to discuss their finding.
The status of the assignment will be given as inconclusive. In this case, there may be further steps you can take to resolve the uncertainty and these will be explained to you.
If you have difficulties discussing the contract with your agency or client, we have negotiated specifically discounted rates with Brookson Legal Services Limited for all Brookson customers. Brookson Legal Services Limited will negotiate with your agency or client on your behalf for the reduced fee of £99+VAT.
What are the possible outcomes of an IR35 review?
There are three possible outcomes following an IR35 review:
- Taxed as PAYE (Captured by IR35) - a deemed payment calculation is necessary, or you should pay PAYE on your income from that assignment);
- Taxed as Self employed (Not captured by IR35) - you can continue to receive dividends from the company without deduction of additional tax and national insurance contributions)
- Caution outcome (i.e. there are a few items which HMRC may query with you which point towards being caught by IR35 which you may wish to address, but overall your contract and working practices point to being self employed which may be sufficient for HMRC in the event of an enquiry into your company)
If my assignment is captured by IR35, what do I need to do?
If the assignment is shown by a review to be captured by IR35, your tax position changes. Payments relating to that assignment should be accounted for using the IR35 regulations. Effectively, this means that PAYE and NI need to be accounted for whether or not the money has initially been taken as a ‘dividend’ for the period of the assignment.
Therefore, there will be additional tax for your company to pay. Any PAYE due relating to payments on that assignment made before your status was confirmed will need to be recalculated.
Your Year End Returns will need to be prepared on the basis that the assignment is captured by the IR35 legislation.
How will I know if my contract is inside/ caught by IR35?
Ask an expert to review it for you. They know the clauses which demonstrate IR35 compliance and what to look out for. Unlimited IR35 reviews are available to all Brookson limited company customers.
What is the MSC legislation?
The MSC legislation affects composite companies and companies which are managed and controlled by advisors rather than the directors/shareholders of a company. The MSC legislation does not make these companies illegal; it merely requires the company to operate as if IR35 applied to income paid by the company irrespective of an IR35 Review. Essentially, to pay a little more tax and NICs than it would usually do if it was outside of IR35.
What is a Personal Service Company (PSC)?
There is no legal definition of a PSC, however, it is generally accepted that a PSC has a sole director and 1-2 shareholders.
How does IR35 affect Umbrella Companies?
IR35 does not apply to umbrella companies as they do not pay dividends to its employees. All income is taxed on a PAYE basis, thus making IR35 redundant.
Can I insure myself against any costs or taxes?
There are insurance products available, but these products require you to undertake IR35 Reviews with reputable solicitors or accountants for the policy to be effective. With Brookson, you have the peace of mind around IR35 from the reviews we undertake and you can rely on the tax promise if anything goes wrong.
I thought that I was outside IR35 and now think I’m caught. What should I do?
Depending when you found out about the error, there are two ways of addressing this:
For current year accounts: You would just need to adjust the amount of tax and national insurance contributions you pay on the income received from an assignment.
This can be done by making a “deemed payment” at the end of the tax year and taking advantage of the 5% discount which HMRC provides to businesses paying tax in this way.
For previous year accounts: You would need to address this with HMRC and settle any interest and penalties which may be levied. We would expect a reduction in any penalties being levied as you are taking action to address the error, but this cannot be guaranteed.
Are all contractors (temporary workers) included under IR35?
Only if they work through a limited company and receive income on the form of dividends.
How common are IR35 investigations?
IR35 enquiries are relatively uncommon compared with other enquiries launched by HMRC. However, HMRC are investing in IR35 compliance and the volume of enquiries undertaken by HMRC is on the increase.
If I have worked for a client before will I be captured by IR35?
This depends on the capacity in which you worked for the client previously.
If you were employed with the client previously you are at a high risk of being caught by IR35 on this assignment unless you can distinguish between the role undertaken as an employee, compared with your current assignment.
If you were engaged as a self employed contractor/limited company contractor/umbrella employee with the client previously you are at a lower risk of being caught by IR35. Although it is important to demonstrate that you are treated differently by the client compared with the way the client treats its employees.
How can I strengthen my IR35 position?
Have and IR35 Review with an expert and talk about your personal circumstances. Brookson have lots of ideas to strengthen your IR35 status and we are happy to share them free of charge.
Should I take out IR35 insurance?
This depends on how much your trust the IR35 Review undertaken by your professional advisor. It isn’t necessary in all instances, but we appreciate there is certainly a place for this type of insurance in the market place.
Does the contract length affect my IR35 status?
There is no hard and fast rule about when the length of an assignment automatically affects your IR35 status – this is very different to the 24 month rule for expenses.
What IR35 services can I obtain from Brookson Legal Services Limited?
We have negotiated the following discounted rates with independent law firm and employment specialists Brookson Legal Services Limited for all Brookson limited company customers:
|IR35 refresher review
|IR35 contract negotiation
|Draft terms of business
|Contract of employment (to enable your company to employ staff)
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