What is IR35?
Imagine that you've been working a normal PAYE job for a number of years. It's Monday morning and you're bored at work so you do a little bit of background reading and find out that you could pay a lower tax rate by being a limited company. You have a think about this throughout the week.
You have a chat with your boss on the Friday morning. Your boss has no problem with you being a limited company and is happy to issue you a standard contract in the name of the company on the same day.
You get a company formed within 24 hours and you start work again on Monday morning doing the exact same job, sitting at your same desk, working on the same projects and tasks.
For all intents and purposes you're basically a "disguised employee" - you're still doing the same job but just using a limited company to pay less tax. This is the whole point of IR35.
If you're caught by IR35 regulations, HMRC will tax you as if you were an employee (with a few differences in the tax calculation) and you will pay substantially more tax.
What are the main areas of IR35?
IR35 puts the emphasis on the contractor to prove that they are not a disguised employee. Two things are absolutely key:
- A well-written business-to-business contract for services
- Working practices of the contractor when carrying out duties on behalf of the client
The main areas that IR35 addresses are as follows:
Supervision & Control
How much control does your client have over what you do? For instance, are you required to be in an office from 0900-1700 and stick to set breaks and maximum 1hr for lunch? If this is written in your contract then it's a huge red flag for IR35 as you're being controlled by your client - a true contractor has control of when and how they work.
Can you use your own tools/equipment to carry out the required work? Contractors can often find they are required to use client equipment for health & safety reasons so if there is a legitimate business case then you should be fine.
Guaranteed weekly or monthly work specified in a contract looks more like an employee’s contract for wages. If the client requires a weekly invoice, then it should detail work completed as well as hours worked and the rate. Any mistakes in the contract must be rectified in the contractor’s own time, and the contract should say this.
Are you risking your own money buying assets, incurring overheads or running costs? These are signs you are not an employee.
Can you supply a substitute if you are unavailable to carry out the work? If you can have another contractor (or member of your own staff) substitute on your behalf (and this actually happens in practice) then this is a clear indication that you're not a disguised employee.
This is something you need to look out for in your contract - if the client has specifically stated you are not allowed to provide a substitute then this is a huge red flag. A true contractor can supply whatever person they see fit to carry out the job.
Mutuality of obligation
Is there an obligation for the client to provide you with work and or for you to accept it? Obligation for work is a basic principle of employment. Does your contract allow you to take on projects from different clients? If you are working for multiple different clients over the year then there is little doubt that you are a genuine contractor.
A contract can appear water-tight but a contractor can be so integrated into the client's organisation that the contract is overridden.
If a contractor appeared on all internal phone lists, was the "on site" health and safety focal point for the client or had any client staff reporting to them then this is another huge red flag as it appears that the contractor is "part and parcel" of the client's organisation - in effect a disguised employee.
What happens if you are caught by IR35?
If you operate outside IR35 and are investigated and HMRC think you are actually a disguised employee, you will need to pay a lot of additional taxes as they will tax you in a similar way as if you were an employee.
As part of our normal fixed fee services for contractors we offer IR35 contract reviews. If you are in doubt about the status of your contract then always double check with us.
Do you want to receive more information about IR35?
Follow this link to contact the team at Source Accounting to find out moreGo