IR 35
What is IR 35?
HMRC introduced the "Intermediaries Legislation", that became known as IR35 in the 2000 budget.
The legislation was introduced to combat ‘disguised employees’. This refers to an individual who would be treated as an employee were it not for the fact that they provide their services via their own personal service company and paying less tax in the process.
Contractors working via limited companies are not liable to pay NICs on income taken as dividends, resulting technically in a revenue loss to the Treasury. As a result of this, IR35 exists to enforce proper working practices.
How is IR35 Status Determined?
To determine whether an individual is caught by IR35, HMRC will look at both the written contract between the limited company and the agency/end client along with the actual working practices. In the event of an IR35 enquiry, the working practices will always tend to carry more weight than the written terms themselves. If a compliant contract is in place, it is crucial that the actual working arrangements mirror the written terms. HMRC will seek clarification of a contractor’s working practices directly from their end client. It is vital that this process is carefully managed.
What Factors Are Considered When Deciding IR35?
The key factors considered when deciding IR35 status are: the extent and degree of control exercised by the client over the worker, the worker’s right to engage helpers or substitutes, mutuality of obligations between the worker and the client, financial risk of the worker, provision of equipment, basis of payment of the worker, personal factors, the existence of employee rights, termination of the contract, whether the worker is part and parcel of the client’s organisation, exclusive services and mutual intention.
This list is not exhaustive and case law shows not to treat this as a checklist to run through mechanically. Instead there are the factors that go towards painting the picture, whose overall effect must be evaluated.
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