Background to IR35
In the period up to the end of 1999, many contractors were self-employed for tax purposes. They would supply their services to a client via an intermediary such as a service company enabling the client to make payments to the company without deducting PAYE or NICs. The worker would then receive the money from the intermediary company largely in the form of dividends instead of a salary, thereby reducing their NICs.
This position suited the individuals; however, it was often the case that those who engaged contractors (‘Engagers’) were the primary driver for hiring a contractor rather than a permanent employee who would have the full suite of employment rights and employer’s National Insurance Contributions to boot.
In 1999, HMRC decided that the tax treatment of contractors should be revised and that they should be treated as employees for tax purposes. As a result, more tax would be due from both the individual contractors as the benefits of self-employment disappeared and also the Engagers in the form of Employers NICs.
The device HMRC introduced to achieve this was a test whereby if the contractor met the conditions, s/he would be required to tax themselves directly, or via an intermediary, as an employee. This became known by the Press Release number of the initial announcement, IR35.
IR35 became effective in 2000.
What is IR35?
IR35 is the name by which the UK tax legislation designed to tax ‘disguised employment’ at a rate similar to normal full-time employment is colloquially known.
The intention of IR35 is to ensure that if the relationship between a contractor and their client would have been one of employment, had it not been for the introduction of an intermediary, the contractor pays tax and NICs on the same basis as an employee of the client.
If an individual contracts their services to one client and is acting as an employee, they will be caught by IR35.
How do I know if I am caught by IR35?
You cannot avoid IR35 and you cannot choose your own IR35 status and neither can your end client or agency. Your IR35 status is determined entirely by the terms and conditions of your employment contract and your working arrangements on a contract by contract basis.
IR35 is highly complex and widely criticised by tax experts and the business community as being poorly conceived, badly implemented by HMRC and causing unnecessary costs and hardships. It is, however a fact of life for contractors and you should take time to understand how it works and how it applies to you. Ideally you should seek expert IR35 advice, which we at the Contractor Co-op can provide, to ensure you have correctly assessed your IR35 status for each individual contract you enter into.
Although the IR35 legislation is to some extent open to interpretation, case law has established a precedent which can be used to assess a contractor’s IR35 status. It is not, however, static and changes over time as different interpretations of laws are made. Contractors, and their advisors, therefore need to abreast of changing IR35 case law to ensure they are applying current criteria in assessing their IR35 position.
One of the most defining cases on the subject of IR35 is the Ready Mix Concrete case from 1969. The principal tests of employment which were identified in that case and which still form the basic test of employment are:
Control: What degree of control does your client have over what, how, when and where you perform your services.
Substitution: Are you obliged to fulfil your contract personally or can you send a substitute in your place?
Mutuality of Obligation: Mutuality of obligation (MOO) is a concept whereby the employer is obliged to offer work, and the worker is obligated to accept it.
There are other factors which are considered in determining whether you are caught by IR35 including:
the contract type;
whether you are taking a financial risk;
whether you are regarded as ‘part and parcel’ of the business you work for;
being in business on your own account; and
provision of your own equipment.
As is evident, there are few clear-cut positions in relation to IR35 status. For your own peace of mind you should ensure that you have taken advice from a reputable IR35 expert each time you enter into a contract to ensure that you have interpreted the rules correctly.
What to do if IR35 applies
If IR35 applies to your contract, then as an employee of the Contractor Co-op you would be subject to PAYE and NI on all the income paid to you in respect of that contract.
Please see our Blog pieces on IR35 reforms.
IR35 is a very complex and potentially expensive area of tax law which contractors need to be aware of.
The directors of the Contractor Co-op are keen to empower individual contractors to enable them to make decisions based on a sound analysis of the facts of each contract they enter into.
If you remain unsure of your position on IR35, we do have access to tax and legal advice in house.
For more information please call us on 020 3468 0009.