IR35 is legislation that was brought in by the Government in April 2000, to counter what HMRC class as a disguised employment.
Off-payroll working in the public sector
From April 2017, where workers are engaged through their own limited company to work for a public sector body, responsibility to apply the intermediaries rules (commonly known as the IR35 rules) will fall to the public sector body, agency or other third party paying the worker's company. The public sector body, agency or other third party will be liable to pay any associated income tax and National Insurance.
Where individuals are working through their own limited company in the private sector, the existing rules will continue to apply.
To help the public sector body, agency or other third party to determine whether the intermediaries rules apply, HMRC will provide a new interactive online tool. The aim is to support the decision making process, not only for public sector employers, but also for individuals working through their own limited company in the private sector.
If a permanent employee left their company on a Friday then returned to work on a Monday with the same company in the same role but as a self employed contractor, this would be considered disguised remuneration and fall foul of IR35.
IR35 was designed to stop employers from releasing their employees from permanent jobs and rehiring them as contractors without the need to pay National Insurance or PAYE tax. At the same time it would also remove the work rights (i.e. unfair dismissal, sick pay etc.) of the employee.
What does IR35 mean for you?
If the contract with your client has the same level of risk, responsibility, liability and control as a permanent employee would, then you could be classed as inside IR35. You would therefore not be entitled to the benefits of a corporate tax structure as you are not taking the same risks or have the same level of control as a Director of his/her own limited company. Consequently you would have to pay PAYE tax and full National Insurance and the expenses you can claim would be reduced and ultimately you would earn less money
Is there any benefit in trading through your own limited company if you are inside IR35?
If you are inside IR35 you can still claim: travelling and accommodation expenses, 5% of your turnover and benefit from the VAT flat rate scheme. So, from a financial point of view it still could be worth it. Also, any other contract work you do could also be put through your existing company.
Accounting IT can review your contract and, drawing on their experience, advise whether or not, in their opinion, it falls foul of IR35.
Accounting IT can review your contract and, drawing on their experience, advise wether or not, in their opinion, it falls foul of IR35
How to ensure you fall outside of IR35
IR35 has an extremely complex set of regulations. Whilst this is not a comprehensive list, the below pointers should give you a rough idea if you are outside of IR35:
Control - Are you free to work under your own management and not completely managed by your client?
Financial risk - As an employee your financial risk is limited but, if you are a director of your own limited company, you are always at risk of the client not paying for work carried out. In addition, if you need to provide your own equipment (i.e. laptop, mobile phone etc) for work, this is a cost that ultimately can experience a financial loss.
Right of Substitution - Does your contract have a clause allowing somebody other than yourself to perform the task your company has been contracted to do?
Providing your own equipment - Will you be using your own equipment? If you are not using your own equipment, allowances can be made if it is for good reason (i.e. your clients data security means you cant use your own computer)
Contract termination - If you have a fixed notice period HMRC can argue that this is like an employee.
Work rights - As a contractor, you should not expect to receive benefits such as holiday pay, sick pay, Christmas bonus etc. from your client.
When considering IR35, HMRC will not look at one issue; they will consider the whole circumstances collectively to determine if you fall inside or outside of IR35. If you have any concerns, please contact a member of the Accounting IT team where one of our experts can assist you.
Require more information?
If you would like more information or would like to speak to us direct then call us on 0800 141 3393. Or if you would prefer, ask us a question online.