IR35 tax legislation has been in force for over ten years yet still remains a mystery to many. The coalition government has announced a commitment to review it and possibly replace it with something simpler. However, as yet, its future is not resolved.
The aim of introducing IR35 was to clamp down on individuals who passed themselves off as companies when undertaking contracts in order to reduce their NI and income tax contributions.
It therefore sets out rules to distinguish between genuine contractor relationships and those where the worker is actually treated as an employee.
Contractors working in construction have to contend with CIS as well as IR35, with both seeking to counter what HMRC considers unfair tax avoidance. However, they are different:
• CIS aims to identify the status of the contractor, whether an individual or company
• IR35 focuses on an individual contract and applies to a single worker rather than a company affected by it.
It is possible to be normally viewed as a sub-contractor under CIS but to be treated as an employee for a specific contract under IR35 regulations.
Action Needed
Falling within the provision of IR35 will cost you because you will be obliged to pay both employers’ and employees’ NI contributions on your earnings as well as income tax. This can significantly reduce your income.
For each job you undertake, you must have a contract that sets out your relationship with the employer. This must have terms that cause it to fall outside IR35 provisions. If in doubt, seek the advice of a professional with experience of IR35.
IR35 Check List
To check the IR35 status of an individual contract, go through it and assess it against the following points:
• Are you personally required to provide the service and prohibited from substituting other workers?
• Is there a regular weekly or monthly amount payable, irrespective of the amount of work done?
• Is all insurance and other cover provided by the client?
• Are the same level of benefits available to you as for permanent employees?
• Are you required to work full-time on the contract, with no option of undertaking other work at the same time?
• Is the contract open-ended, with a notice period?
If the answer to all these questions is ‘yes’, then you are likely to fall under IR35 and suffer the extra costs.
General Treatment
The crucial test is whether you are acting and being treated in the same way as an employee. Inclusion in the company’s telephone directory and on organisation charts is pretty firm evidence of this, although the provision of training and equipment is not since it may, for example, be for health and safety reasons.
If you are taking on work that was previously done by an employee or if HMRC has previously ruled the role falls within IR35, it’s probably bad news.
It is important that you get the contract sorted out before you start and be sure of your status. If not, you could incur some unexpected costs.