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What is IR35 about?
This legislation was introduced in 2000 to target “disguised employment”, situations where workers provide a service to their client through a personal service company but are effectively “employed” by their client.
The legislation is meant to help differentiate between “employment” and “self-employment”.
Workers who are deemed to be “employed”, have to pay income tax and national insurance on all payments made by their “client” to their personal service company.
IR35 applies a number of different tests to the working relationship between the worker and the client to determine the employment status.
- Substitution test: can the worker send in a substitute to carry out the work on his behalf?
- Control test:
- Does the worker have to work specific hours?
- Does the worker have to work at the client’s premises?
- Does the worker have to request permission for time off?
- Does the worker have control over the way the work is carried out?
- Mutuality of Obligation test: does the worker or client have to serve a notice period before terminating the contract?
- Financial Risk test: Does the personal service company charge a fixed fee for the work? What happens if there are unforeseen delays or errors?
- Part and Parcel test
- Is the current client also the last permanent employer of the worker
- Is the worker included in the client’s internal annual performance reviews
- Does the worker attend training paid for by the client?
- Does the worker attend the client’s social events
- In Business on own account test
- Does the personal service company advertise for new clients?
- Does the company have a website, logo, VAT registration, professional indemnity insurance, business cards and stationery?
Jane is a self-employed IT contractor. She provides her services through a limited company, Jane Smith Ltd. She has one client, Pear Ltd, which was also Jane’ last permanent employer. Under the terms of her contract, she is required to work at the client’s premises from 9am to 5:30pm Monday to Friday. If she is unable to work, she is not allowed to send in a substitute to carry out her work in her place. She is required to ask permission for any time taken as holidays. She is also included in the client’s annual performance reviews.
IR35 will apply to this contract and therefore, all payments made by Pear Ltd to Jane Smith Ltd are treated as employment income on which Jane Smith Ltd must pay income tax and employee National Insurance.
Peter is also a self employed IT contractor, supplying his services through his limited company, Peter Woods Ltd. He has a number of different clients. He works mainly at his office, and occasionally at his clients’ premises. He plans his own work on a day to day basis according to the demands of the business. He can choose when to take time off work. He regularly pays for his own training and also advertises online for new clients.
In this case, IR35 does not apply to the contract.
IR35 legislation is very complex. Responsibility for assessing whether each contract/working relationship falls under IR35 or not, lies with the personal service company, effectively the worker.
The penalties for getting it wrong are severe. In addition to paying income tax and national insurance, there will also be interest and penalties.
It is therefore essential that directors of personal service companies, assess each contract and working relationship carefully, preferably taking external advice from a specialist.
Clayton Accountants cannot advise on IR35 issues but if you wish to seek advice I can refer you to a specialist IR35 contract reviewer.