IR35 is tax law that was introduced in 1999. It is also popularly called the Intermediaries Legislation, and it came into effect in April 2000 under the Finance Act. IR35 gets its name from the then Inland Revenue, which is now the HM Revenue & Customs (HMRC). The legislation covers every individual worker who functions through an intermediary, such as a private company or a partnership. The law would only be applicable in circumstances wherein had it not been for the partnership or the limited company, the individual worker would be under normal employment terms. The new IR35 rules tighten their grip on individuals working via intermediaries and intend to penalise these ‘disguised workers’ if they are unsuccessful in meeting the ‘IR35 test’.
The IR35 was brought in by the UK government to address the challenges related to disguised employment, which is a major tax evasion tactic used by many companies. Companies hire workers/individuals on a self-employment basis via intermediaries rather than hiring them as regular employees so that their tax burden becomes low. This helps the employers evade government taxes, as they are not obliged to pay the National Insurance Contribution (NIC) and other employment benefits to these disguised employs, which leads to the saving of large sums of money. The intent of IR35 is to protect both, employees as well as the government—the employees from having their labour rights ignored and the government from losing legit taxes.
The IR35 Legislation and Deemed Salary
To stop the practice of disguised employment and increase the tax turnover for the HMRC, the IR35 brings in the ‘deemed salary’ concept. If a disguised worker happens to have similar advantages, accountabilities and control like any other permanent employee, he/she is more likely to come under IR35. Post application of IR35, the earning from engaging the intermediaries would be as deemed payment, as it is deemed to be the earning of the workers. Deemed payment is normally released on the 5th of April at the end of each financial year. If more than one worker is covered in the same contract, the deemed payment has to be made for both of them, and if the hiring company pays out only a single lump sum amount, then the amount has to be equally divided among all workers under the same contract. All deemed payments are subject to NIC and tax deductions.
How do I identify if I’ve been caught by IR35?
There have been many contesting views related to the imposing of IR35, as the legislation tends to convert even an authentic one-person business into an employment contract. Therefore, the tests of employment were introduced, wherein business owners can contest the claims of IR35 under the UK legal system. The tests determine if a worker is in actual an effective employee or if he/she is working as a disguised one. The overall case is worked out on the basis of the nature of the daily operations at the company, which should be aptly reflected on the contract.
The HMRC will mostly try to disregard the contracts by offering several reasons. Some of these have been discussed below.
- The contract isn’t a live/working contract.
- This is a bought off the shelf contract and has been copied; it doesn’t reflect the genuine terms and conditions.
- We (the HMRC) weren’t involved in the contract preparation process; hence, we don’t regard the terms of the contract.
- The HMRC has not confirmed the contract to be a self-employed one, as it was not submitted to us for confirmation in the very first place.
What factors are considered to determine the IR35 compliance status of a business?
In a majority of the cases, it is the responsibility of the HMRC to consider the complete business scope and financial picture of an enterprise before providing a judgement. The following are some of the most common factors considered while determining whether a business is IR35 compliant or not.
- Which business functional area does the client operate in?
- Was a contract of any sort formed or created?
- Does the contractor seem to be in a financial peril as per the contract?
- Does the contractor work for any other client or not?
- Does the contractor use its own equipment and material at the work site?
- In case of rectifications, does the contractor bear full amount for the changes?
- Does the contractor provide substitute workers to complete tasks on his/her behalf?
- Is the contractor an integral part of the client company?
- Are there any milestones or deliverables set out to be achieved during the project’s course?
- What are the motives/intentions of all the parties involved?
- How long has the project been signed for (its duration)?
- How clearly defined are the terms of the contract? Have the contractor’s work hours, notice period, location, etc. been clearly defined in the contract?
- Has the contractor wage structure been accurately defined? Are requirements such as pay date, payment type (whole or parts) and employment type (fixed or project-based) been clearly explained in the contract?
- Has the government confirmed the IR35 status in the past?
It should be kept in mind that the HMRC questionnaire for determining the IR35 compliance status of a company will have well over 80 questions; therefore, it is important to answer every question with utmost care and caution. It is also advised to not leave any question blank, as it will make the question open to the interpretation of the HMRC, which might not really work in the favour of the contesting company.
What will it cost me if I fail IR35?
There isn’t really a fixed amount that you end up paying in case you fail IR35. The amount due would depend on the contract rate, and companies usually have to pay the extra NIC deduction and income tax that would have been made on the deemed salary. However, the HMRC may refer to records that date back to up to six years to verify if the IR35 regulation has been followed, which means that if found evading taxes, you may end up paying 6 years’ worth of income tax and NIC.
Few tips to avoid getting caught into IR35 investigation
- Ensure your contract doesn’t mention your name. It is ok if it names a company who is providing you as a contractor to your client.
- Be sure that your contract nowhere mentions that you ‘cannot’ work with any other company in the same industry.
- Don’t ask your client before taking a leave, specially a sick leave. Don’t ask, inform.
- Follow what your client asks you to work upon but keep in mind that if you agree to do everything that your client asks you to, you are falling in the IR35 record.
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