IR35 - What's It All About?
Put simply, the Intermediaries Legislation (now known as IR35) relates to the tax rules put forward by the Inland Revenue (now ‘Her Majesty’s Revenue & Customs’ “HMRC”) to restrict freelance contractors from gaining tax advantages by claiming to be self-employed when they are not.
The Intermediaries Legislation was introduced on 6th April 2000; it was first proposed by the Chancellor in the 1999 Budget and details were given in the Budget press release which was called IR35.
Following consultation, revised proposals were announced in a new press release dated 23 September 1999, the legislation caused such a stir in that it changed the face of freelance contracting in the UK and it is now commonly referred to as ‘IR35’.
In HMRC’s own words; ‘The aim of the legislation is to eliminate the avoidance of Tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise – for tax purposes, be regarded as an employee of the client; and for NICs purposes, be regarded as employed in employed earner’s employment by the client.'
This means that if you are working through a company as a contractor rather than as a direct employee of a client company and you are providing your services directly to that client company, then the IR35 rules have to be considered prior to deciding how you are paid, i.e. as an employee subject to full employed levels of PAYE and National Insurance (“NI”) – if the way you provide your services indicates that you fall within the IR35 rules; or as a self–employed sole trader or a limited company director and shareholder which allows for you to pay beneficial levels of tax and National Insurance.
The rules surrounding IR35 are complex, however, it is very important that they are fully considered, and the appropriate pay method is applied to your earnings, as all self-employed workers and limited company directors are required to submit a tax return to HMRC.
This means that HMRC are fully aware of the working status you are claiming and are able to conduct investigations into your status. If they are not convinced that you are truly in business on your own account, they have the power to make you pay the full amount of underpaid tax and charge additional penalties.
It is imperative that you take your approach to your employment status seriously. Recent case law includes the recent Dragonfly case which considered whether Jon Bessell, the director and owner of Dragonfly Limited, was a disguised employee of his client’s business for certain assignments he worked on and therefore working within IR35. The Judge in the High Court found that he was, which resulted in a £99,000 bill for unpaid tax.