Compliance – IR35
For a full guide on IR35, read more here.
What is IR35?
IR35 was a piece of legislation introduced by HM Revenue & Customs as part of the Finance Act 2000, and was aimed at addressing the £900 million loophole in the tax law.
A contractor can work in different ways, either through an umbrella company or alternatively they can set up their own limited company. This, with the aid of an accountant, enables them to manage their income. Historically this can mean a low take-home salary drawn with expenses and a balance usually in the form of a dividend. A dividend will not attract National Insurance deductions or tax below a certain value, and so often is much more appealing to contractors.
IR35 target these individuals as opposed to umbrella companies who comply with the IR35 rules. The system is governed by the self-assessment process, in addition to the Inland Revenue assessing what tax it considers to have been avoided – up to 100% of the avoided tax can be issued as a penalty.
An example of non-compliance with IR35?
A systems engineer could opt to leave a permanent position with a company on a Friday, returning the next Monday as a contractor. He/she would be doing the very same job as before, using the very same processes as before but working via a limited company intermediary.
The IR35 legislation states that this type of contractor is in fact a ‘disguised employee’ and therefore is subject to the very same National Insurance Contributions (NICs) and Income Tax as any regular employee is.
How can I tell if I comply to the rules of IR35 Employment legislation?
We have constructed below a general assessment test to help you figure out your IR35 status. Each of the set criteria below need to be assessed both individually and as a whole. Inland Revenue will assess the situation as a whole and not its individual parts. This should enable you to decide whether you are indeed self employed or if your status is actually akin to being employed.
If the contract clearly states you will be paid on an hourly, daily, weekly or monthly basis, this could be considered a strong indication of you being “employed”. If, however, there is an agreement in place to be paid in, for instance, stages based on accomplished work or the finishing of a project in interim stage, then this would more likely be perceived as being of a “self-employed” status.
Are you instructed on a day-to-day basis, what to do by the client? If the answer is yes, then this is quite a strong indication of you being of an “employed” status. However if you control the work schedule and what is to be completed on a day-to-day basis, in addition to how that work is completed, then this strongly indicates that you are of a “self-employed” status.
This relates to the term of a contract. Do you work on any one contract for a long period? If so, this couldbe perceived to be a career or permanent position and therefore employment. Shorter contracts do often signify a self-employment status.
Often contractors classified as skilled workers providing services to multiple clients in a professional/business environment are considered to be of a self-employment status.
This is quite simply your risk of profit and loss in good and bad times. If you financially gain in good times and financially suffer in bad times this is considered to be a good indicator of your self-employed status. Price work is also a good indicator of self-employed status if you are likely to suffer financially if a job is not completed on time or the agreed services are to be delivered. If you get paid regardless, i.e. just for being there, then this leans towards being employed by the Inland Revenue. Using your own equipment and suffering the devaluation of such use of equipment is also a good indicator of self-employment status, whereas using the equipment of an employer is as it sounds, an indicator of being employed.
If you have the right to subcontract a part or all of your contract, then this is a strong indicator of you being of a self-employment status, regardless of whether you have actually substituted or not.
If termination of a contract can only be issued due to breach, then this would suggest self-employment. In practice, this can be difficult to get away from, most clients will require a notice period.
For a full guide on IR35, read more here.