The IR35 Phrasebook

When searching the internet for information on the IR35 legislation, you can be met with a lot of technical language and terminology that you might not entirely understand, especially if you are new to the game. Here we will try and lay out the expressions and phrases that are commonly used when discussing IR35 and put it all into layman terms whilst addressing some key points about IR35 along the way.

Firstly, it is important to briefly address IR35 in itself; IR35 refers to the intermediaries’ legislation, a piece of tax law designed to combat tax avoidance by self-employed workers using intermediaries to falsify their employment status for tax purposes. I.E. to stop people from using a company in order to seek tax benefits whilst still enjoying the benefits of permanent employment.

Intermediary: a legal entity which exists between the worker and end client, usually but not restricted to, a limited company.

Employment status: the manner to which your services have been engaged with reference to tax liabilities.

In order to determine your employment status, HMRC will need to look at your written contract and your working practices. They will apply certain status tests which look to differentiate your situation from that of a permanent employee, most notably the existence of personal service (also known as right of substitution), control and mutuality of obligation.

Written contract: this is the agreement made between your company and the end client or agency, transcribed and signed by the two parties involved.

Working practices: the manner in which the worker conducts their business on a daily basis. These are sometimes referred to as the day-to-day working relationship between contractor and end client. Your working practices should mirror the terms of the written contract and will always hold more weight in an investigation.

Status tests: a collection of assessments designed to determine whether you are acting as a genuine business or like that of a permanent employee. Despite their existence, it is important to remember that an individual test alone will not determine your employment status, your situation must be assessed as a whole with all things considered.

Right of substitution: the ability to supply an alternative worker of sufficient skill, qualification and experience to undertake the contract. The existence of a personal service requirement suggests a likeliness to employment as opposed to a business which would be able to supply any worker they saw fit to complete the contract. A substitute worker should still be under the responsibility and paid by the original company who undertook the contract.

Mutuality of obligation: the common view held between worker and client that work must be continually offered and accepted by the respective parties. More focus tends to be placed on non-mutuality of obligation which refers to your right to walk away from a contract.

If after investigation you are found to be inside IR35, and thus deemed a disguised employee, you will be liable for backdated taxes and national insurance contributions with interest on top and a potential penalty payment. To avoid it coming to this however, there are steps you can take; having a professional contract review prior to commencing work and assessing your working practices once work has commenced. This will allow you to properly assess your employment status in the eyes of IR35 for each contract and pay the tax associated with the outcome. If you find you are working inside the legislation, you must pay income tax and NICs on all income from that contract. To do this you must make a deemed payment at the end of the tax year.

Inside IR35: this is a term used to describe those working in a manner where the rules of IR35 apply, i.e. those whose working conditions do not comply with the legislation. ‘Outside IR35’ is a term also used in order to describe the contrary.

Disguised employee: a term used to describe those working in a manner where the rules of IR35 apply, also referred to as being ‘inside IR35’. The opposite condition is often referred to as a ‘genuine contractor’.

Deemed payment: the sum of income tax and national insurance contributions compensated to HMRC for work to which the IR35 legislation applied to during a tax year.

For further information regarding the IR35 legislation, contract and working practices review services or insurance policies, contact us today or visit our website.

By:Jane Hailstone

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