Getting to know the IR35 legislation

As a limited company contractor, you will almost certainly come across the term ‘IR35’

IR35 is the shorthand for the ‘Intermediaries legislation’ implemented in 2000. At the time that the legislation was introduced the year before, the taxman had a big problem with a loophole which existed and needed to be taped shut. Widespread use of intermediaries, such as limited companies, was occurring but not for the use of genuine business purposes, it was for the sole purpose of making tax savings. Employees were able to start up a business of their own, and continue under the same role and working conditions as before but by now operating through a company, they could pay less tax and national insurance contributions (NICs). Their employer would also benefit from paying less employers NICs so everybody was winning. Except for HMRC.

The IR35 legislation was brought in to tackle the problem, operating as the decision-making process on whether a worker using an intermediary is genuine or a ‘disguised employee.’ Genuine contractors are not entitled to the same benefits of an employee such as holiday pay and take on much greater responsibilities, such as the responsibility to correct errors at their own expense. A disguised employee is likely to hold on to these employment benefits which is why it is seen as cheating.

Many genuine articles have found the legislation to be punitive and ill administered for them just as much as for the frauds. After all, a genuine contractor using a limited company is perfectly entitled to the tax savings which go along with this manner of trading, yet the legislation can target anyone and as the legislation is built on historic case law, whereby changes can be made with each significant case, there are a lot of grey areas which leave many confused and in uncertain situations.

The assessment of employment status is dealt with on a case-by-case basis, which means there aren’t really any definitive rules to the legislation. Exceptions always exist. That said, a number of ‘status tests’ are used to determine your employment status under the IR35 legislation, although as mentioned, their importance can change with each case and there are always exceptions to the general rule-of-thumbs accepted by the majority of status experts. Such tests include:

• Do you hold the right to provide a substitute worker?
• Do you provide your own equipment to undertake the contract?
• Do you have autonomy over your method of work?
• Is your client obliged to provide you with further work and/or are you obliged to take it?

The above is not a definitive list of the status tests which are taken into consideration. The tests are applied both to the written contract which you hold with your end client or recruitment agency and your working practices (the true nature of your working relationship with your client). The written contract and working practices should mirror in their terms, otherwise the working practices will likely trump the written contract in an investigation, and the former is a lot harder to prove and a lot easier to misinterpret. Each engagement may differ in whether it is found inside or outside the IR35 legislation so each engagement will demand individual assessment.

If you are a limited company contractor, you should have your written contract assessed by a professional status expert such as Qdos Contractor, followed by a review of your working practices to ensure that you are compliant with the legislation. If you are found to be within the scope of the IR35 legislation, you may need to make a deemed payment, i.e. a payment of extra tax and NICs to HMRC at the end of the tax year. A conversation with your accountant in this event is advised.
Failure to make a deemed payment calculation where it is due could result in a court case with HMRC, should they investigate, and land you with a bill for backdated tax, NICs and a potentially hefty penalty. Penalties are generally reduced where it is seen that you took steps to ascertain your status, such as having professional assessments of your contracts. If you ignored those assessments however, it will not go in your favour. Qdos offer insurance policies which include professional representation from day one of an enquiry and can continue to cover for those liabilities if eventually caught. We also offer consultancy and representation for those who do not hold policies.

The rules are not the same for everyone, however. If you are an office-holder, i.e. holding a position in your end clients company where you make decisions effecting that business, such as a chief executive, or if your contractual chains ends with public sector money, including that of the NHS and BBC, further rules will apply and further research is encouraged.