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IR35

IR35 is the common name for the Intermediaries Legislation, which is designed to combat tax avoidance. The legislation is targeted at individuals who are providing services through their own limited companies or partnerships and who may not be paying the tax that they should be. 

The legislation should be of huge concern to all contractors; the financial ramifications of falling foul of IR35 can be significant so it is vital that everyone understands how it works.

First issued in 2000, IR35 targets those workers considered in the eyes of the HMRC to be ‘disguised employees’. Contractors, being technically self-employed, are not taxed in the same way as average employees, taking dividends from their company and paying far less in National Insurance Contributions. Because of this, HMRC are keen to ensure that those working as contractors (and paying less tax) are indeed genuinely in business on their own account, and are not working in the same way they would have been if employed directly by their client.

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Some of the criteria used to determine whether someone is ‘inside’ (i.e. caught) or ‘outside’ IR35 is common sense; if you act like and are treated like an employee you should be taxed as one. However, there are a lot of grey areas in the legislation and some points which may seem relatively insignificant can have a major impact. Therefore it’s always best to consult an expert before making any decisions over your IR35 position.

If you choose to work ‘outside’ IR35 and take dividends from your company, you run the risk of being on the receiving end of an IR35 enquiry. This is effectively an investigation where HMRC review your circumstances and ultimately decide whether or not you have been paying tax correctly.

If they decide that you are a ‘disguised employee’, you will be required to make a deemed payment, effectively paying back all tax and NI you would have paid if you were an employee (plus interest and a possible penalty). This can easily run into tens of thousands of pounds, which is why IR35 is such a big issue for contractors.

In an enquiry, HMRC will look at the contract you have with your agency (or end client if direct), so this is the first thing to check when deciding how to trade. Some contracts will contain negative clauses from an IR35 perspective, so it’s important to have it reviewed as early as possible. They will also delve into the actual relationship between you and your client, commonly referred to as your actual working practices.

If your contract is IR35 compliant but they subsequently find that you are treated like an employee in reality, they will effectively say the written contract is worthless. It is therefore vital to ensure that your contract and working practices mirror each other.

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