The IR35 law, officially called Intermediaries Legislation was introduced in April 2000. The purpose is to identify “disguised employees” who hide behind intermediary companies and therefore avoid paying tax and National Insurance contributions. The IR35 is designed to work out a contractor’s “employment status” so that if they are found to be an employee of the client for the contract period, they will still have to pay income tax and NI contributions. As a contractor, your IR35 status is determined on a contract by contract basis, depending on the terms of the assignment so you must complete an IR35 audit before commencing each contract.
Falling Within IR35
Essentially, if you fall within IR35 you will have to pay PAYE tax and NICs. The law will see you as an employee, however temporary of the client for whom you are undertaking a project. You may use an intermediary, such as a limited company in order to be paid, but they must be paid by a salary, not dividends. The contractors that fall under IR35 rules will have to pay schedule E taxation, however, unlike normal employees, the contractor may claim for certain expenses from the client.
How do I know?
You are likely to fall within IR35 and have to pay tax if the client you are currently working for requests or apply a lot of control to the work you do. You may fall within IR35 if:
- Your contract specifics dates and times when you must come in to work
- The company may have paid for contractors before, and without you knowing HMRC may have ruled that the contracts an employer provides are within IR35
- If you have to wear a company uniform
- If a supervisor or manager is assigned to the contractor to monitor or oversee the project
- If the client is constrained to work on one contract at a time
- If you have to attend training provided by the client
Falling Outside IR35
To be considered fully outside the IR35 legislation, you must be able to prove you are fully self-employed. This means you have to be completely independent of the client, and work on your own terms. Your contract should be flexible so that you can work when and where you like, as long as the job gets done. This will entitle you to be paid through dividends by your own company vehicle (such as a Limited Company) rather than paying PAYE tax.
How do I know?
The more control and freedom you have over your work when you enter into a contract, the more likely it is you will fall outside IR35 and be judged by HRMC as genuinely self-employed. A contractor is essentially someone who supplies their expert skills and knowledge to a company for an indeterminate period, until a piece of work is completed. You will be viewed as outside IR35 if:
- You are able to take on more than one contract at once
- If the contractor is allowed to invoice the client for payment when project milestones are completed
- You can work when, where and how you like, as long as the work is done
- You can subcontract help, or provide substitutes if you find you cannot work
- You can terminate the contract whenever you like
- If you have an identity pass it should state you are “freelance” or even a “visitor” so you are not part of the company
Essentially, HM Revenue and Customs will recognise you as a “disguised employee” of your client if you become too involved in the company or you let them have too much control over your work. When you draw up the contract with the client, you should be careful to negotiate all the terms so that you fall outside IR35. You should state carefully your intentions and that you wish to be a contractor so that the employee understands your wish for freedom in your work. If you do happen to fall within IR35, you will have to pay tax, but you still get the advantages of higher wages than regular employees.
The IR35 legislation is complex, and if you are unsure of your status or need advice on how to change your employment circumstances, ICS are on hand to help. Visit our IR35 page for more legislation information, or Contact Us to speak to a specialist advisor.