IR35, also known as the Intermediaries Legislation, is concerned with employment status (employed or self-employed) for tax and National Insurance purposes.
At its most basic, it means that if you provide your services to a third party (the client) through a limited company (an intermediary) then you have to consider IR35 for each and every contract you undertake.
IR35 is concerned with your relationship as an individual with the end client. To be inside IR35 means that this relationship is effectively one of disguised employment and you will have to pay employed levels of tax and NIC on your income. If the relationship is not disguised employment and is outside IR35, you are free to account for your own tax and NIC on your income through your own company.
The net result is that being inside IR35 usually costs you a lot more!
|Beginners Guide to IR35|
Tax/NIC status: How is it decided?
There is no statutory definition of employment or self employment. We have to look to the courts and the decisions that have been made over the years where the employment status of a person has been decided. These decisions relate to tax, NIC and also employment law rights including unfair dismissal cases and holiday and sick pay cases etc. Consequently there is a large body of case law to consider.
To decide status it is necessary to look at all the terms and conditions of a relationship. This includes any terms set out in written contracts as well as what happens in reality – the working arrangements. It is then necessary to interpret and apply up to date case law precedent to the findings.
IR35 is concerned with showing whether or not you are a disguised employee of your client. Technically this is not the same as showing that you are a self-employed worker but we have to apply the same status tests as you would in deciding employment or self employment.
An IR35 status case is more complex because it is necessary to construct an hypothetical contract between the worker and the end client. Where an agency is involved there is often no contractual relationship between the worker and the end client and in some cases there can be multiple parties involved and all the terms and conditions between all of the parties need to be considered.
Perhaps the most difficult issue is that where you have entered into a contract with an agency (the lower contract) you have in the majority of cases no right to see the contract entered into by the agency and the client (the upper contract) to provide your services and it is often the case that there are conflicts between these two documents.
It is recommended that you seek some sort of confirmation of your working arrangements from the client in these circumstances.
It is necessary to consider IR35 each time you enter into a new arrangement or contract. This is because IR35 concerns relevant engagements, so for example, you could undertake five different contracts in a year and three could be found to be inside IR35 and two outside. It is even possible to provide services to the same end client for two different projects and come up with one inside IR35 and one outside IR35 as the terms and conditions and the working arrangements could be different.
Why is IR35 complex?
IR35 is complex and often contentious for a number of reasons. Perhaps the main one is because of the way status is decided in that it is all about interpreting case law precedent.
The emphasis the courts have given to particular factors has changed over the years, as has HMRC’s interpretation of the courts findings. New cases come before the courts all the time and cases go before the General Tax Commissioners or Special Tax Commissioners every day.
It is absolutely vital to keep up to date with these cases just as HMRC does!
Another reason for the difficulties with IR35 is that it is currently impossible to have any certainty regarding your IR35 status at any point until such time as you have been subject to a full HMRC IR35 investigation into your status and you are holding the HMRC letter in your hand that agrees with the decision you made. Even then the letter holds no comfort for future contracts.
The extent of IR35
Important note: IR35 can affect individuals and partnerships as well as those providing their services through service companies. There are some exemptions such as associated companies and also some special cases that will always be inside IR35 (nannies and chauffeurs, teachers etc). As the overwhelming majority of cases concern workers operating through a UK registered limited company in the UK these notes are deliberately confined to cover this business model.
It is recommended that specialist advice should be obtained in all other cases.
The wording of the legislation has not been included here but can be viewed on HMRC’s website.
There are some minor differences between the tax and the NIC legislation but essentially there are three requirements for the legislation to apply and all three have to be satisfied before the worker can fall into the IR35 rules.
- The first requirement is that the worker personally performs (or is under an obligation personally to perform) services for the client
- The second is that the services must not be provided directly by the worker to the client but via an intermediary
- The third is that the circumstances (terms and conditions and working arrangements) are such that if the worker provided the services directly to the client the worker would be regarded as an employee of the client
It will be a matter of fact whether or not you carry out the services personally and satisfy the first condition as will the presence of an intermediary, thereby satisfying the second condition.
It is of course the third condition that poses the problem which is showing that the terms and conditions and working arrangements do not amount to disguised employment.