What is IR35?
IR35 or intermediaries legislation was introduced in April 2000 the aim being to tax individuals who provide services through their own limited companies and partnerships. Essentially it targets contractors who might be avoiding paying the tax they should be paying by presenting themselves as self-employed. Contractors are technically self-employed and as such are not taxed in the same way as general employees; they take dividends from their company and pay less in NI contributions. The HMRC sees these people instead as disguised employees who should be taxed in the same way as a general employee. The legislation looks here to stay and it is vital for contractors to be aware of it and stay compliant to avoid financial penalties. Contractors need to stay within the all- important definition of ‘self-employed’ to beat the IR35 rules but this is not always as easy as it sounds. So first of all, consider whether IR35 applies to you.
Does it apply to me?
You need to consider whether the HMRC would consider you employed or self-employed which is not as straightforward as it sounds due to the ambiguity of HMRC’s terms. The HMRC will need to consider that you are genuinely in business under your own account. The Revenue will consider the relationship between you and your clients for each contract and assess whether your actual working practices reflect the contractual position. They are not swayed by job titles or descriptions but by the actual facts of each engagement. Even IR compliant contracts might not on their own save you from an IR35 inquiry – if the HMRC deem that you are in reality being treated like an employee then your contract could be worthless. The worst case scenario would be that you are required to make a deemed payment which basically comprises of all the tax and NI you would have paid, not to mention any interest and a possible penalty.
How do I make sure I am IR compliant?
The key is to ensure you have evidence, and continue to compile evidence, that you are outside the IR35 remit.
1) Your Contracts
Review all your contracts to ensure that they demonstrate you are a genuine, independent business contracting for each individual company. Consider drafting a ‘confirmation of arrangements document’ which will act to back up your contract and show compliant working practices that tally up.
2) Right of Substitution
If you provide exclusive services for a business this may be harder to demonstrate by contract alone so consider your right of substitution. The thinking behind this is that to demonstrate your independence, you could send a suitable replacement for a day because as a contractor you provide a service. An employee, by contrast, provides his services personally. The right of substitution is a very strong test of self-employment.
3) Provision of Equipment
As a contractor you would be expected to have your own equipment. You are more likely to be deemed an employee if you are being provided with it by those you are working for.
4) How are you paid
As a contractor you would negotiate a rate for a service and invoice for your work. If the company is paying you weekly for example and bearing the cost of overheads you are slipping into employee territory.
5) Responsibility and Control
How much autonomy do you have? A genuine contractor will not be supervised or controlled by another business like an employee would be, for example with regard to set working hours or being moved from job to job.
6) Stand alone factors
Do you have your own company stationery? Do you advertise independently and observe your own policies and training requirements? Do you have your own professional indemnity, employer and public liability insurances? Are you separately VAT registered? All of these are good indicators that you are an independent contractor and not a disguised employee.
It is important to review your position and be proactive about how your services are viewed and compared to your actual working practices. The HMRC are tightening their grip on those who have not addressed the IR35 issue and potentially fall within its remit. Strengthen and clarify your position now to avoid the financial burden of a breach.
Lawbrief Hannah Newell has practiced in commercial and corporate law and she has worked both in private practice and more recently in house. She has specialised in the negotiation and drafting of commercial contracts, company asset and share sales and Dispute Resolution, both civil and commercial.