What is IR35?
The Intermediaries Legislation, or IR35, has been around since 2000. The aim of the legislation is to remove the tax advantages that come from individuals providing services via a limited company, who are actually ‘disguised employees’ working for a client company.
In terms of the current rules, liability for ensuring compliance with IR35 is on the contractor providing the services. As of 6 April 2020, this liability will lie with the client company instead.
If HMRC decides that the company has not taken ‘reasonable care’ when determining a contractor’s IR35 status, the liability will be transferred to that company, irrespective of whether or not that company actually pays the contractor’s fees.
To determine whether a contractor is ‘inside IR35’ (i.e. more of an employee than an independent service provider), the following criteria must be considered:
- Is the contractor subject to the company’s control?
- Is there a right of substitution (i.e. can the contractor provide someone else in his or her place)?
- Is the contractor integrated into the company’s business, or are they truly carrying on business on their own account?
- Is there a mutuality of obligation between the parties?
This is the same set of criteria under the current rules, however, the burden for making this determination now rests with the client company, and not the contractor.
If a contractor is deemed to be ‘inside IR35’, then the client must deduct employee’s and employer’s national insurance, as well as income tax, from the contractor’s pay.
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