What is IR35?

What is IR35?

Feb 13, 2017

As a contractor, it’s important that you’re aware of and understand the implications of IR35 legislation.

If your working arrangements fall within the IR35 criteria this will affect your tax liability and National Insurance payments.

What is IR35?

IR35 is HMRC’s way of identifying what it terms ‘disguised employees’ to ensure the correct taxes are applied.

The rules are relevant to anyone who works on a contractual basis for clients as a self-employed contractor, sole trader, freelancer or consultant.  It also applies if you fulfil contracts via an intermediary such as an employment agency, your own limited company, personal service company or partnership.

HMRC says that you must work out your employment status for each contract by considering what that relationship would be if there wasn’t an intermediary involved.  If your relationship would be considered as an employee, then IR35 applies to you.

Determining whether IR35 applies to you

Our team of experts can determine whether IR35 applies to a current contract or one you are considering undertaking.  A consultation by telephone will help to identify any working practices within your contract which could be considered disguised employment by HMRC.

Once you know your position you will be able to make an informed choice about whether you wish to fulfil the contract or renegotiate your terms.  This will alleviate any worries you may have about paying the correct tax.

Much of the assessment around IR35 relates to the degree of direction, control and supervision involved in your role.  For example, IR35 could apply if:

  • you are instructed or required to perform the work in a particular way
  • you manage your client’s staff and are involved in duties such as appraisals, disciplinary procedures or leave approval
  • you have to request leave and are not free to choose what hours you work
  • you use tools and equipment that belong to the client
  • your client could terminate your contract with short notice.

Let’s take the example of a decorator.

If the decorator is commissioned to paint a wall in a particular colour, with no further involvement from their client, they are unlikely to be subject to IR35.  However, if the decorator has to be on-site within set hours, is provided with equipment and told to start on the left-hand side of the wall and finish on the right, they will probably fall within IR35 rules as they are subject to a greater level of direction, control and supervision.

What’s the impact of IR35?

If you fall within the IR35 criteria you will find that there is a significant impact on the amount of tax you pay.

IR35 would effectively mean you pay tax and National Insurance in the same way as a general employee, which means you will have to contribute more and your take home pay will be less. Importantly, while you may be taxed as a general employee, you would not be classed as an employee by the company your contract is with and therefore not entitled to general employee rights such as sick pay or benefits such as pension schemes.

Penalties for non-compliance

It is vital that you understand whether your working arrangements mean you are subject to IR35.  HMRC can levy interest and penalties on any extra tax and National Insurance contributions that are owed, with more severe penalties if it’s proven that IR35 rules have been deliberately ignored.

What to do next

To find out if IR35 applies to you, get in touch with a member of our expert team on 01244 684700.  Our standard IR35 assessment is free of charge.  We can provide a more in-depth IR35 assessment, including a review of the contractual terms between your company and a client.

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