Please see below a list of our frequently asked questions related to IR35
IR35 (also known as the Intermediaries Legislation) is tax avoidance law that came into force in 2000.
The purpose of IR35 is to identify when a worker is really a “disguised employee” and is working as a contractor to benefit from associated tax perks. This is often seen where a contractor provides services via a limited company – known as a Personal Service Company.
Although HMRC are keen to look closely at anyone running a Personal Service Company (PSC) there is no official definition of a PSC.
Typically, a PSC is a limited company that has a sole director who owns most, or all, of the company’s shares and provides consultancy services to an end client.
A worker who is contracted to fill a position (often permanent) within a company, who is paid on a contract basis to avoid the tax and National Insurance associated with employment (PAYE).
If you’re a contractor providing a service to one client on a long-term basis you are at particular risk of being caught under IR35, as you could be considered to be a ‘disguised employee’.
A contract review, along with a check on your working practices will be required to determine your IR35 status.
If you are "outside IR35" you are seen to not be caught by the legislation. In other words, you are legitimately working within the law, and can work as an independent contractor.
If you are "inside IR35" you are seento be caught by the legislation and although you can continue to provide services via a limited company, the tax perks and advantages are essentially lost as you must pay yourself the majority of your income on a PAYE basis and pay the associated tax and National Insurance.
HMRC introduced an online tool - Check Employment Status for Tax (CEST) which you can use as a guide - but this has come under extreme criticism across the industry.
IR35 is complicated - there are many grey areas.
We recommend that you get a thorough Contract and Working Practices Review from an expert. Nicola, our Founder, has worked in the contractor industry for 9 years and has a wealth of experience in IR35 - get in touch for more details.
When assessing your IR35 status, you should consider the following factors, and bear in mind that these are the factors HMRC would look as if you were involved in an IR35 review.
3. Part and Parcel
5. Mutuality of Obligation
6. Financial Risk
One of the key indicators or tests of IR35 status is Control.
To work outside IR35, the contract and working practices must demonstrate that you (the worker) have significant control over the work that is done including how and when the work is carried out. If the contract indicates that the client has a high level of control - this points towards a status of employment.
One of the key indicators or tests of IR35 status is Substitution.
To work outside IR35, the contract and working practices must demonstrate that you (the worker) have the ability and right to send a replacement/subsitute worker in your place. It is important to note that it is not always enough for the contract to state that you can provide a substitute if in reality, that would not be possible.
One of the key indicators or tests of IR35 status is whether a worker is seen as Part and Parcel of the business.
To work outside IR35, the contract and working practices must demonstrate that you (the worker) are independent and work accordingly. It is important that there are clear differences between the way a contractor and an employed member of staff in the same workplace are treated and perceived.
For example; being provided with a company parking space, access to company benefits and being referred to as integral to the business, would point quite clearly to a status of employment.
Effective Accounting are contractor and IR35 specialists.
We have extensive knowledge of the legislation and follow the changes within the industry carefully to ensure we are ahead of the game for all our clients.