If you are operating as a contractor or freelancer, the term “IR35” may be one which you have heard banded around without realising its significance and the consequences of being caught by the rules.
What is IR35?
IR35 was introduced in 2000, and in a nutshell the rules are designed to prevent employees working artificially as contractors through a limited company or an agency in order to reduce their tax and national insurance liabilities. This is known as “disguised employment”.
The premise of the rules stems from the relationship that an individual has with the person for whom the services are provided. Subsequently once any perceived veils such as a limited company are removed, HMRC would consider whether the relationship would continue to meet the indicators of self-employment.
The difficulty in determining whether an individual is self-employed is not helped by the fact that legislation does not provide a clear definition of self-employment and instead relies on examining the nature of the relationship as well as the terms and conditions of the engagement against case law.
Broadly speaking the key principles which have been highlighted by case law, centre around the examination of the following factors;
If you are able to provide a substitute, are not controlled by your client and there is no mutuality of obligation present then this is a strong indicator that you are outside of IR35.
The responsibility for determining whether the IR35 rules are applicable depends on whether the individual is providing their services in the private or public sector. Individuals are responsible for determining their own status for work performed in the private sector whereas public authorities are responsible for work carried out in the public sector.
Consequences of being caught by the IR35 rules?
If you are deemed to be inside of IR35, you will be taxed as if you were an employee of the company and therefore pay broadly the same tax and National Insurance contributions as an employee.
It is worth noting that each contract or engagement is tested in isolation and as such it is possible to have some contracts which are caught by the legislation and others which are not.
There may still be certain advantages of continuing to work through your own limited company, whilst being caught by the rules.
How can we help?
As specialist contractor and freelance accountants, our team has years of experience in reviewing contracts to determine the IR35 status. If you would like to know more please call our help desk on 0161 791 1674.