IR35

IR35 is a UK tax legislation contained in Chapter 8, Part 2 of the Income Tax (Earnings and Pensions) Act 2003 ('ITEPA'). It applies to workers of personal service companies (limited company contractors) who provide services to clients via their own limited company.

Those providing what is seen as a genuine B2B service are able to pay tax more efficiently through the use of low salary and dividend payments, but HMRC believes there are thousands of workers using such an arrangement but acting more like an employee, and they want to reclaim the tax and national insurance contributions the worker would have paid if employed by the client.

HMRC may choose to carry out an enquiry on anyone they suspect to be "caught" by the legislation. Following this process, HMRC will calculate the individual's total income for the period in question as salary and attempt to recoup the applicable tax and national insurance contributions previously paid as dividends. 

If you’re a limited company contractor, you need to have your employment status assessed for tax purposes (IR35 status) and pay the relevant tax according to this status.

There are different rules in place dependent on if you’re working for a small business in the private sector, a medium-large business in the private sector, or a public sector body.

 

Contracting for a small business in the private sector

Congratulations! You still have complete control over your IR35 status as contractors have done since it was introduced in 2000. It does mean there’s more to do though.

You’ll need to assess your own IR35 status and make sure you’re paying the right tax. There’s plenty of guidance available to you and we can help you with the assessment, whilst your accountant should be able to take care of the taxes. Remember, your status and therefore tax payments can be different for each contract and even change within the same contract.

 

Contracting for a public sector organisation or medium-large company in the private sector

Your end client is responsible for assessing your status and if you’re considered inside IR35, the company which directly pays your fee has to deduct the tax before paying you (much like an employee). Welcome to the off-payroll working rules.

You don’t have a lot of control over this but remember these key things; your end client is obligated to give you written confirmation of your status (a Status Determination Statement) and you have the right to dispute the result.

The legislation is based on historic case law which means that each significant case which goes before a judge can change how future cases are assessed.

However, for the best part of the legislation's existence there have been three key tests which underpin every status assessment:

1. Right of Substitution; the right to provide a substitute worker in order to fulfil the contract,
2. Right of Control; over how the contract is delivered, and
3. Mutuality of Obligations; or rather the lack of existence of a mutuality of obligations between the parties.

Using these three tests plus numerous other factors to view the nature of the relationship as a whole, Qdos, HMRC, the courts, and now end clients, can determine the status of a contractor operating as a limited company. This is usually done by reviewing the written terms and conditions of the contract, as well as the day-to-day working practices, which is how the contractor and client operates in reality.

Understanding whether an individual falls inside IR35 is complex and can have significant consequences should HMRC determine that tax is owed.