What is IR35?
The IR35 legislation was introduced by HMRC in April 2000 and is intended to combat tax avoidance. Any contractor that is deemed to be employed (rather than self-employed) is said to fall under IR35. In that case the contractor is required to extract all the money out of his limited company as salary (instead of dividends) and to pay both the employee and employer Class 1 National Insurance (23.8% of gross salary, to increase to 25.8% next year). Moreover, since April 2007, after the introduction of the Managed Service Company (MSC) legislation, contractors can only receive dividends if they operate their own personal Limited Company. If they receive payment through an intermediary then they can only receive payment via PAYE, which means paying income tax and both employee’s and employer’s national insurance, even if they fall outside of IR35.
It's easy to understand why a number of contractors want to ensure that they do not fall inside of IR35. HMRC has put together a few simple questions that one can answer which will help determine the IR35 status. If you answer "yes" to the following, then it is likely you will be deemed a "disguised employee" and will therefore fall inside IR35:
- Do you have to do the work yourself?
- Can someone tell you at any time what to do, where to carry out the work or when and how to do it?
- Will you work a set number of hours?
- Can someone move you from task to task?
- Are you paid by the hour, week, or month?
- Will you receive overtime pay or bonus payment?
If on the other hand you can answer "yes" to the following questions it is more likely that your contract will fall outside of IR35:
- Could you hire someone to do the work or engage helpers at their own expense?
- Do you risk your own money?
- Do you provide the main items of equipment you need to do your job, not just the small tools that many employees provide for themselves?
- Do you agree to do a job for a fixed price regardless of how long the job may take?
- Can you decide what work to do, how and when to do the work and where?
To ensure that you are not caught by IR35, it is therefore critical to have a contract that spells out clearly your working practices. To determine whether you are caught by IR35 HMRC will look at that written contract between your limited company and the agency but also at the actual working practices. The key areas that must be considered and incorporated in the contract if you are to remain compliant are:
- Personal Service/Substitution
- Control
- Mutuality of Obligations
- Provision of Equipment
- Financial Risk
- Basis of Payment
- Exclusive Service
- Part and Parcel of the Organisation
- Intention of the Parties
- Business-like trading
For a contract to be "IR35-proof", all those need to be properly addressed. While having a great contract is no guarantee, failure to have one will decrease your chances of falling outside of IR35, with the tax consequences that we know (not including the penalties – cf. Dragonfly case).
Yes, the rules can be complex, but we are here to help. If you need help setting up as a contractor, don't hesitate to contact us.
