The circumstances in which the IR35 legislation applies
If you provide your services to a client (the end-user) via an intermediary, typically a service company or partnership, and the intermediary does not meet the definition of a Managed Service Company, then the IR35 legislation may apply to engagements with that client.
Broadly, it applies to those engagements where:
- you personally perform services for another person (the client);
- the services are provided not directly with the client but under arrangements involving an intermediary (e.g. a limited company or partnership); and
- the circumstances are such that, if you had provided the services directly to the client under a contract between you and the client, you would have been regarded for income tax purposes as an employee of the client and/or, for NICs purposes, as employed in employed earner's employment by the client.
The overall effect of the legislation
The IR35 legislation is designed to stop the avoidance of tax and NICs by individuals who provide their services to clients through an intermediary such as a company or partnership, rather than working as an employee. Directors of companies can pay themselves a low salary and then take the remaining profits as dividends to avoid tax and NICs on salary payments.
The effect of the legislation means that if you have contracts which are caught by IR35, it may not be as attractive and tax efficient to provide your services through this kind of business structure. This is because you must calculate what is known as the 'deemed payment' and pay tax and NICs on this amount in addition to any salary payments.
Occupations affected by the legislation
The legislation is not targeted at any particular occupation or business sector. It can apply in any business sector. Examples of occupations where people work through service companies run right across the board, including medical staff, chief executives of large plc's, teaching profession, legal and accountancy staff, construction industry workers, IT contractors, engineering contractors, clerical workers and many others.
However, new rules from April 2017 mean that workers providing services in the public sector are no longer responsible for determining if IR35 applies to their engagement. It will now be the responsibility of the public body to determine the status of the worker, and their responsibility or the agency to deduct tax and NICs from their pay.
Do the rules apply to me?
The rules will apply to your intermediary if it does not meet the definition of a Managed Service Company, and you can answer 'yes' to both the following questions:
- Would you be an employee if you worked for your client directly and not through your company or partnership?
- Does the company or partnership you work through meet the conditions set out below?
These questions are explained in more detail below.
Would I have been an employee of my client?
The IR35 rules only apply if you would have been an employee of your client, had it not been for the existence of your Personal Service Company or partnership.
If you can answer 'yes' to most of the following questions, you would probably have been an employee of your client for the contract in question and therefore within the new rules:
- Do you work set hours, or a given number of hours a week or a month?
- Do you have to do the work yourself rather than hire someone else to do the work for you?
- Can someone tell you at any time what to do, when to work or how to do the work?
- Are you paid by the hour, week or month?
- Can you get overtime pay?
- Do you work at the premises of the person you work for, or at a place or places he or she decides?
- Do you generally work for one client at a time, rather than having a number of contracts?
If you can answer 'yes' to most of the following questions, you would probably not have been an employee of your client and therefore outside the new rules:
- Do you have the final say in how you do the work for the client?
- Can you make a loss on the contract?
- Do you have to provide the main items of equipment you need to do the job for the client, not just the small tools many employees provide for themselves?
- Are you free to hire other people on your own terms to do the work you have taken on?
- If you are free to hire other people on your own terms, do you pay them out of your own pocket?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
- Do you have a number of clients at the same time?
You will have to think about each contract individually. Some people will find that they have some contracts which would have been employment and so come within the rules, and others which do not.
You can submit contracts to HMRC for an opinion or there are specialist firms who offer services to determine if your contracts will be caught by the legislation.
What happens if the IR35 rules apply to my contract?
If you work in the private sector, your Personal Service Company or partnership should operate Pay As You Earn (PAYE) and pay NICs on any payments of salary during the year in the usual way.
You may also have to pay an additional amount of tax and NICs, based on the payments received by your company or partnership for your services, at the end of the tax year or earlier, if you break your connection with the company or partnership during the year. Your company or partnership will also pay employer's NICs on the same amount.
In addition, from April 2016, tax relief for travel and subsistence in relation to an IR35 contract is now denied.
Further information about the IR35 legislation can be found on the HMRC website:
This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2020.
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