What is IR35?
Intermediaries legislation or ‘IR35’ as it’s commonly known as is a set of anti-avoidance rules that were introduced in April 2000, to prevent disguised employment. It was designed to stop contractors who would be otherwise classified as employees but worked through their limited companies to gain the tax benefit associated with it.
Prior to the rules, a worker would resign from his employment on Friday and return on Monday to the same role in the same company. The only difference now is he was employed by a personal service company of which he is a controlling shareholder and director.
By providing services through their own company, the worker could avoid national insurance contributions and minimise his tax liability by paying himself through a combination of salary and dividends. The original employer on the other hand could avoid paying Employer’s NI, thus saving 13.8%. IR35 rules were implemented to punish such activities.
How does IR35 affect you?
If you are caught within the legislation, then you can end paying 25% more in tax each year as you can no longer operate by paying yourself a minimum salary and taking the rest through dividends. You will be required to draw all your income as salary and pay tax the same way as an employee.
What’s my IR35 status?
Unfortunately, there is no clear description on what constitutes employment or self-employment and hence most of the IR35 cases are referred through employment cases. The Ready Mixed Concrete Case (1968) laid the fundamentals for what constitutes employment and it was established for employment to exist, there must be three conditions:
Personal Service: Is there a requirement for the worker's personal service?
Control: Is there a sufficient degree of control over the worker?
Mutuality of Obligation: Are the mutual obligations of the contract consistent with employment?
Why are these three conditions so important? Because if the answer to any of these questions is 'no', then the contract cannot be of an employment and the worker can be termed as self-employed.
Personal Service or Substitution
There will be no requirement of personal service if a contractor has an unfettered right to substitute or subcontract the services to a third party. This is because unlike employment, where an individual is required to carry out a role; the contractor has the right to send someone else to do the work implying she/he is self-employed.
Under an employment contract the employee is told what needs to be done, where it needs to be done and how it needs to be done. In a self-employment contract it is reasonable to assume that there will be a job description outlining the services required, where the services need to be performed but if the contractor is told how the services need to be performed than it may indicate employment. So, if the contractor has autonomy over the working methods or how the services are delivered and cannot be moved from task to task as the client’s priorities change; than he can be termed as self-employed.
Mutuality of Obligation (MOO)
Although this one of the conditions which Revenue disregards completely, the presence of mutual obligation between the parties is essential for employment to exist. An employee is usually provided with continuous work and is expected to complete the work provided implying MOO exists. If in a contract there is no obligation for the client to offer further work during or after the assignment and the contractor is not obliged to accept further work if offered, it would mean no MOO exists between the client and the contractor indicating self-employment.
There are various other secondary factors which may be considered when deciding IR35 status such as the intention of the parties, the level of financial risk undertaken to see if the company is genuinely into business, but the point to be remembered is if any part of the irreducible minimum is not present, then the relationship simply cannot be one of employer and employee.In case of enquiries your working practices will be examined along with the contract – it is important to ensure your working practices are consistent with those mentioned in the contract and you are running a genuine business.
The best way to find out your status is to have an IR35 Contract Review to determine whether the engagement falls inside or outside IR35.
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