IR35 Factors, IR35 Compliance, are you caught?

The term 'IR35' first reared its head in 1999 via an Inland Revenue (HMRC) press release entitled: 'IR35: Countering Avoidance in the Provision of Personal Services'.

"The purpose of the new rules is to remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions (NICs) by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker."

IR35 became law via Schedule 12 of the Finance Act 2000 - its prime aim was to ensure that individuals working via limited companies would be subject to the same tax and NI rules as a person performing the similar task under standard 'employee' conditions.

You can read more background in our IR35 history guide.

The IR35 rules were invented primarily to stop contractors from working via their own personal service companies (limited companies), and paying less tax and national insurance than normal employees who were performing almost identical tasks on a client site.

In determining whether a contractor's employment is deemed to be subject to the IR35 rules or not, HMRC would need to work out if that person, when carrying out that specific contract, is 'employed' or 'self employed' according to employment status rules.

You can read more in our guide to IR35 compliance.

A person who worked 9-5 on a client site, had little or no direct responsibility and provided no tools of his own to complete a task would most likely be deemed to be 'employed' and therefore subject to the IR35 rules.

However, a contractor who worked from home, performed tasks for a number of clients, used his own equipment, and could provide a substitute person to complete the work would more likely be deemed 'self employed' under the rules.

HMRC look at the overall working practices as well as the wording of the actual contracts involved to determine a person's employment status, so the more pointers there are to genuine 'self employment' the better.

The IR35 rules apply to individual contracts - not to the person performing them. Therefore, a contractor may perform two contracts in a given year - one may be subject to IR35, and the other may not.

HMRC's IR56 guidance has been provided to help people work out if they will be liable to IR35 or not.

If a person's contract falls under the IR35 rules, they will receive most of their income in the form of a deemed payment together with a miserly '5% allowance' to cover intermediary expenses.

They will also be able to claim other expenses on top of the 5% allowance, such as contractor insurance cover and pension contributions.

Since the IR35 legislation became law in 2000, many IR35 cases have been disputed, and on the whole HMRC has found it hard to uphold the new laws.

There is a dramatic difference in the levels of taxation between those caught by IR35 and those not, so if you believe you may be 'employed', you should seek professional advice BEFORE signing a new contract and take time to read our more in-depth guides to various aspects of IR35.

Further Reading

• A history of the IR35 tax legislation
• Why contractors should review their IR35 status
• IR35 contract review service providers
• Is your contract caught by IR35?