Are you affected by the IR35 legislation? The IR35 legislation was introduced in April 2000. The legislation was introduced to identify â€˜disguised employeesâ€™ who trade through a limited company to avoid employers NI and achieve other tax breaks.
Although the legislation has been around for a number of years, it has only been in the more recent years that the Inland Revenue have actively started to target IR35 companies. In 2012 budget the Chancellor announced a crackdown on IR35 companies and has since then made changes which affects all contractors.
The problem with identifying IR35 companies, is establishing what makes a company fall under the IR35 legislation. There are many factors to consider before establishing whether IR35 applies or not and quite often you will find taxpayers have factors that point towards IR35 both applying and not applying, leaving tax payers confused over if they should apply IR35 or not.
How do you identify an IR35 company.
As a general guide if you can answer ‘yes‘ to most of the following questions, you would probably have been an employee of your client for the contract in question and therefore within the IR35 legislation.
- Do you work set hours, or a given number of hours a week or a month?
- Do you have to do the work yourself rather than hire someone else to do the work for you?
- Can someone tell you at any time what to do, when to work or how to do the work?
- Are you paid by the hour, week or month?
- Can you get overtime pay?
- Do you work at the premises of the person you work for, or at a place or places he or she decides?
- Do you generally work for one client at a time, rather than having a number of contracts?
If you can answer ‘yes‘ to most of the following questions, you would probably not have been an employee of your client and therefore outside the IR35 legislation.
- Do you have the final say in how you do the work for the client?
- Can you make a loss on the contract?
- Do you have to provide the main items of equipment you need to do the job for the client, not just the small tools many employees provide for themselves?
- Are you free to hire other people on your own terms to do the work you have taken on?
- If you are free to hire other people on your own terms, do you pay them out of your own pocket?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
- Do you have a number of clients at the same time?
This is not a comprehensive or a definitive guide on whether IR35 applies and is a general guideline only.
What do you have to do if you have an IR35 company?
The Inland Revenue have special guidelines in place for IR35 companies which will help the Inland Revenue collect the tax and National Insurance otherwise due. At the end of the tax year (5th April) the company will be required to calculate a deemed payment on all relevant engagements and then process this deemed payment through PAYE, thus paying tax, employees national insurance and employers national insurance.
In short, the IR35 legislation is designed to make sure that the majority of your contract income is processed through PAYE and eliminating any potential tax savings you may have had. We can help you with this.
There are many accountants and tax advisors who will lead you to believe that trading through a Limited Company is the best thing since sliced bread. Quite often clients are not aware of the risks or have been ill advised on trading through a Limited company.
From April 2017, the responsibility for operating IR35 in the public sector now rest with recruitment agents (or other engagers), rather than contractors themselves. In the last budget it was announced that this same change will be introduced to the private sector- ultimately affecting all contractors, could this be the end of contracting? Maybe not, but it will certainly have a big effect on the contracting market.