IR35 is the terminology used to describe two sets of tax legislation that are designed to combat tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.
If caught by IR35, the “deemed employees” have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 is significant. It can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.
Because IR35 essentially seeks to turn a legitimate one person small business into being an employee, it is underpinned by employment legislation and IR35 case law. As a result, the tests of employment evolved over decades by the UK legal system are applied.
Essentially, an HMRC inspector will attempt to disregard the written contract in force between the worker and their client, and use the actual nature of the working relationship to create a ‘notional contract’.
Determining whether you are caught by IR35 is complex, and ideally you should seek expert IR35 advice. However, you can use on IR35 Shield to provide you with guidance about your IR35 status.
In short, IR35 involves applying three main principles to determine employment status from the Ready Mixed Concrete case. These are known as the principal ‘tests of employment’:
- Control: what degree of control does the client have over what, how, when and where the worker completes the work
- Substitution: is personal service by the worker required, or can the worker send a substitute in their place?
- Mutuality of obligation: mutuality of obligation is a concept where the employer is obliged to offer work, and the worker is obligated to accept it.
Other factors are then taken into account to determine whether you are caught by IR35 include the contract type, whether you are taking a financial risk, if you are ‘part and parcel’ of the engager’s organisation, being in business on your own account and provision of equipment.
For firms that are hiring self-employed contractors, IR35 will not apply. That does not prevent HMRC from launching an investigation at a later date, which can be time consuming, costly and highly stressful.