What is IR35?
IR35 legislation was implemented in April 2000. These changes
were introduced by the Inland Revenue to counter tax avoidance (not evasion)
in the area of service provision (i.e. Private Limited Companies).
The contractor community in general (and IT contractors in particular) were
identified as “tax avoiders”, resulting from the tax saving
benefits they enjoy when working through a Private Limited Company, while
performing roles similar in nature to those of permanent employees.
The Inland Revenue initially stated that the legislation
targets were ‘Friday to Monday’ workers (permanent employees
who return the next Monday morning as contractors). It has since become
clear that IR35 has been implemented and targeted at contractors but not
just those in the IT sector. The Revenue argued that if the agency and or
the service company were removed, a large number of contractors would really
be “disguised employees” who should be included on the client
payroll and have tax and NIC deducted each month. It's scope has increased
beyond this sector and careful consideration needs to be made as to whether
your contract is "caught" in IR35 or not? Again help is at hand
from Legal Practioners, PAYE Payroll Service or Umbrella companies, some
accountants and of course the Inland Revenue, if you are not sure seek advice.
The Government announced the “rule changes” which would take
effect from 6 April 2000. The first reporting and payments would be due
from 19 April 2001.
IR35 has resulted in increased National Insurance
liabilities, administration and significant reduction in recoverable expenses
for those contractors using a Private Limited Company and in some cases
has removed the option of trading as a Private Limited Company altogether(see
below). In short, for the majority of contractors this is no longer a financially
attractive option. However, its demise has increased the popularity of Payroll
Companies (Umbrella) as the preferred payment vehicle and increasing numbers
of experienced contractors are also migrating to this trading style.
Does IR35 apply to you?
IR35 applies to all contractors who do not meet the Inland Revenue definition
of "self employment". As a rule of thumb, if you only have one
current contract, you travel to the same workplace each day, you are paid
by hour or day rate, you work under the jurisdiction of the client and you
have no right of substitution (i.e. if you cannot go into work that day,
you cannot send a replacement in your place) then you will probably fail
the Inland Revenue’s self employment definition and it is likely you
will be trapped by IR35 legislation.
IR 35 & Case Law:
Contractor employment status under IR35 legislation
depends on the interpretation of both employment and IR35 case law. It’s
an important issue, because contractors judged to be inside IR35 can face
significant bills from HMRC for additional taxes, interest and penalties.
"less taxing" approach to Contracting and Freelancing