To decide if you would fall within the IR35 legislation and deemed as being an employee there are three main factors that are considered (although other factors may also apply).
Can someone tell you at any time what to do, when to work or how to do the work?
Do you work at the premises of the person you work for, or at a place or places the client decides?
Do you have to do the work yourself rather than hire someone else to do the work for you?
Are you free to hire other people on your own terms to do the work you have taken on?
Do you work set hours, or a given number of hours a week or a month?
Are you obliged to accept work offered to you by the client?
Is the client obliged to provide you with future work?
Simply having an 'IR35 friendly' contract that contains terms implying you have control, can provide substitute workers, and have no mutual obligation between your company and the client will not be enough on its own to allow you to fall outside of the IR35 legislation. In reality there are many different factors that can deem you as 'inside' or 'outside' of IR35 so you should always consult an expert in the field for a professional opinion on your personal circumstances.
IR35 is a piece legislation that was put in place by HMRC in April 2000. The purpose of its introduction was to prevent individuals who would usually have been classed as an employee of their client avoiding tax and national insurance contributions by contracting through a limited company. Prior to the legislations introduction individuals could use a limited company as an intermediately and avoid paying PAYE tax and national insurance on their earnings like any other employed individual would usually have to do. Instead they could use a limited company to pay themselves in dividends (avoiding paying national insurance and PAYE tax).
The IR35 legislation looks at the relationship between the contractor and their client. If the relationship is one of a typical employer and employee and the individual had not been using a limited company as an intermediary the legislation will not allow the contractor the right to draw their income in the form of dividends. Instead their income will have to be in the form of a salary from their limited company and appropriate PAYE tax and national insurance contributions paid.
Working alongside IR35 experts Qdos Contractor, we want to ease the burden of IR35, and help contractors achieve peace of mind when it comes to the dreaded HMRC legislation.
IR35 was introduced over 10 years ago, but despite this, the legislation has not always taken centre stage within the contracting sector. It was not until July 2010 that the Revenue decided to turn up the heat on contractors, and with much activity recorded in this year, reignited their enforcement of IR35.
Since 2010, a much publicised 'crackdown' on IR35 has been splashed across the media, with 2013 seeing the tax office announcing their fourth specialist team tasked solely with enforcing the legislation and targeting 'disguised employees'.
As a result of HMRC's promise to 'come down hard' on those who did not meet the criteria of a compliant contractor, the number of inquiries increased. Data revealed that enquiries tripled in the first half of tax year 2012/13, from 59 in 2011/12 to 193 in the first six months of 2012/13. This trend continued throughout 2013, and shows no sign of slowing down for 2014.
Being 'caught' by IR35 is a position that no contractor wants to be in. The effects of this can be devastating for a limited company, and can be financially crippling for self-employed professionals. By working as a contractor, despite striving to achieve compliance, the risk of being subject to an IR35 enquiry is something that cannot be ignored. An IR35 enquiry is basically an investigation where that tax office reviews a company's working practises, and ultimately decide whether or not you fit their description of a 'disguised employee'.
Contractors penalised by the Revenue in regarding to IR35 will be required to make a deemed payment, where they pay back all tax and NI that would have paid if they were operating as an employee (plus interest and a possible penalty that could potentially reach tens of thousands).
IR35 is a serious business for any contractor operating through a limited company. There is a reason why the IR35 rules exist. Don't make the mistake of thinking yourself exempt from the IR35 rules and regulations; you are not.