IR35 is a tax legislation that is designed to stop tax avoidance by workers, such as contractors, who supply services to their clients through an intermediary.
IR35 has been around since 1999 and if you are a genuine contractor or freelance worker who is in business for themselves – and are able to prove such fact, then you should have nothing to fear. The legislation is in place for people who are working as ‘disguised employees’ and therefore have different tax implications applicable to their business.
If you fall inside IR35, you should be paying employed levels of tax. If you fall outside IR35, you may choose to pay yourself using a combination of salary and dividends.
The bottom line lies at this; if you are inside IR35, you are effectively an employee of the place you work at, even if it doesn’t say that in writing. If you are outside IR35, you are completely running your own business, being able to prove that through a number of scenarios.
Falling outside IR35
A person who does not fall under IR35 should be able to prove that they are separate from the business that they are doing work for and can show that they are not connected to the client’s business by proving they do not have the same set hours, benefits, pension arrangements etc and can demonstrate that they are not under the control of the client’s project manager.
Once it has been established that a worker has clear differences between them and the client’s working conditions, it needs to be proved that the worker is in business for themselves.
This can be shown by:
- A website, company stationery & business cards
- Advertisements in local / trade publications
- Listings in business directories
A worker will also need to prove that they are not a PSC – a Personal Service Company as this will fall under the IR35 tax rules. Setting up a Limited Company with your own name is an example of how the HMRC could determine a PSC.
Setting up a business with the name Joe Bloggs Ltd will imply that Joe Bloggs will be completing the work, whereas if the company is set up JB Marketing Ltd, it could be a colleague that completes the work, not necessarily an individual.
Falling inside IR35
Those people who fall inside IR35 are classed as ‘disguised employees’ by HMRC. If you are a contractor that works solely for one client and is entitled to the same level of benefits as the employed members of staff, you are likely to be falling into IR35 legislation. An HMRC inspector can determine this working relationship by reading between the lines of contracts of workers and their clients and by performing a number of investigation techniques to discover the underlying working relationship.
If you are a genuine contractor or legitimate small business who is managing their business well, you will have nothing to worry about. You must ensure that your contracts are compliant and reflects true working practices and this is your responsibility as the contractor.
These factors need to be considered in all contractors to ensure that you are IR35 compliant
- Working practices
- Right of substitution Control
- Provision of equipment
- Financial risk
- Basis of payment
- Exclusive service
- Part of the Organisation
- Factors personal to the contractor
- Mutuality of obligation
There are very fine lines between falling under IR35 or not which the HMRC take very seriously. Each case is reviewed individually and if you fall under the IR35 rules of the ’‘Off Payroll Working’ issued by the HMRC it’s good to practice to get fully informed of everything that you need to know to avoid tax penalties.
If you’re a contractor or freelancer providing a service to clients and would like advice on whether the IR35 tax rules apply to you, get in touch, we’d love to assist.