As a Contractor you must know about IR 35 legislation. Even if you are new to contracting, you cannot ignore this important legislation. It's important that you know about it as it affects all people in the contracting business. IR35 was announced in the March 1999 Budget and became effective from 6 April 2000.
For Whom
The legislation was designed to deal with "disguised employees". These are the individuals whom the government believed were taking advantage of a corporate structure when they should have been taxed under employment as any other employee. The rules only apply to "relevant engagements" - where an individual provides services to a client through an intermediary (a limited company) and, but for the existence of the intermediary, the income would be treated as that of an employee if the individual had contracted directly with the client.
Implication
The intention of the legislation is that, apart from specified deductions, all money received by the intermediary in respect of relevant engagements should be treated as paid to the individual in a form subject to Schedule E income tax and class 1 national insurance - Thus all dividend payments and many business expenses are not allowed.
Status Tests
It is important for the intermediary to decide, for each engagement, whether the contract is in the nature of an employment as far as the individual is concerned. Existing tests which are applied to determine whether an individual is employed or self-employed will be used.
There are three main tests which are mention below.
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Control: A worker will not be an employee unless there is a right to exercise control over the worker. This may be a right to control what work is done, where or when it is done or how it is done. Right of control is important and not the actual control. |
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The right to get a substitute or helper to do the job: personal service is an essential element of an employment contract. A Self employed is a person who has the freedom to choose whether to do the job himself or hire someone else to do it for him, or can hire someone else to provide substantial help. |
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Mutuality of obligation: There should be various mutual obligations within the contract. The obligation to perform and be paid for performing would form part of any contract - but the mutual obligations needed for a contract of employment to exist consist of more that this, there needs to be obligation to offer and an obligation to accept future work. |
There are many other factors as mention below:
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Financial risk: There has to be real risk of financial loss. For example: An individual, who risks his own money by investing into assets needed for the job and pays their running costs and overheads, is most probably self-employed. Financial risk could also take the form of working on a fixed price for a job, with the risk of bearing the additional costs if the job overruns. However, this will not necessarily mean that the worker is self-employed unless there is a real risk of financial loss. |
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Right of dismissal: In a contract for service there is no right to terminate an engagement by giving notice of a specified length which is a common feature of employment. Contract for services usually end on completion of the task, or if the terms of the contract are breached. |
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Provision of equipment: All the equipment needed to do the job is generally provided by the self employed contractor. The provision of significant equipment or materials which are fundamental to the engagement is of particular importance. For example, where an IT consultant is engaged to undertake a specific piece of work and must work exclusively at home using the worker's own computer equipment that will be a strong pointer to self-employment. But where a worker is provided with office space and computer equipment that points to employment even if worker might occasionally use personal computer at home. |
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Basis of payment: Independent contractors, tend to be paid a fixed sum for a particular job. Employees on the other hand are paid a fixed wage or salary by the week or month and often qualify for additional payments such as overtime, long service bonus or profit share. |
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Intention: it is the reality of the relationship that matters. It is not enough to call a person "self-employed" if all the terms and conditions of the engagement point towards employment. However, if other factors are neutral the intentions of the parties will then be the deciding factor in employment status. |
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Profit from sound management: a person whose profit or loss depends on his capacity to reduce overheads and organise his work effectively may well be self-employed. People who are paid by the job will often be in this position. |
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Part and parcel of the organisation: establishing whether a person becomes epart and parcel' of a client's organisation can be a useful indicator in some situations. For example, someone taken on to manage a client's staff will normally be seen as part and parcel of the client's organisation and is likely to be an employee |
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Length of engagement: long periods working for one engager may be typical of an employment but are not conclusive. It is still necessary to consider all the terms and conditions of each engagement. Regular working for the same engager may indicate that there is a single and continuing contract of employment. |
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Employee benefits: employees are often entitled to sick pay, holiday pay, pensions, expenses and so on. However, the absence of those features does not necessarily mean that the worker is self-employed - especially in the case of short-term engagements where such payments would not normally feature. |
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When the detailed facts have been established the right approach is to look at the picture as a whole, to see if the overall effect is that of a person in business on his own account or a person working as an employee. If the evidence is evenly balanced the intention of the parties may then decide the issue.
HM Revenue & Customs (HMRC) has looked at a number of standard Agency contracts and has, as expected, suggested that such contracts fail IR35.HMRC will only consider whether specific contracts fail the test and will not give any clearance on standard contracts.
The conclusion of all of the above is that if you sign a standard agency contract you are likely to fail IR35. Even if you get a contract worded differently, HMRC will look at the facts behind the contract
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