IR35 is the short name for intermediaries’ legislation. IR35 is classified as off-payroll working rules which apply to workers providing services through an intermediary. Intermediaries can be:
• Personal Service Companies
• a Partnership
• Another Individual
The legislation was designed to stop ‘disguised employees’ from using intermediaries to avoid paying Income Tax and NICs. The term disguised employees refers to individuals that would be considered as employees if it were not for the intermediary i.e. contractors that have guaranteed work without any element of risk (much like an employee). For more information please visit off-payroll working through an intermediary. It is important to pay attention to IR35 because it can increase your tax obligation by up to 25%. There may also be severe penalties for ignoring IR35. If you are a contractor/freelancer that is in business on your own accord then there is nothing to fear from IR35.
What determines whether I fall within IR35 rules?
You can contact us to help you the determine whether you fall under the rules of IR35. HMRC will effectively apply 3 primary principles to determine your employment status:
1) What degree of control does the client (i.e. individual or company paying the contractor for completed work) have over what, how, when and where the worker completes the work. Thus the higher the level of control by the client – the higher the probability of the application of IR35.
2) Is the personal service by the worker required, or can the worker send a substitute in their place? This is looking at the level of substitution i.e. are you offering a specialist service or are you simply fulfilling a job role.
3) Is the employer (or client) obliged to offer work and is the worker obliged to accept it? This is referred to as mutuality of obligation. A major sign that someone is not employed is the element of financial risk i.e. the job or work is not guaranteed. In addition, the ability for the worker to accept or reject work also plays a critical factor.
Other elements such as who supplies the equipment for work etc are also considered. If IR35 applies, then it means that all the income generated by the intermediary less PAYE salary, 5% expense allowance and any pension contributions is subject to income tax and NICs. For more information on IR35 and how it can potentially affect you, contact us today.