IR35 (also known as Intermediaries Legislation) is legislation created to identify individuals falsely establishing limited companies as a means to reduce their national insurance (NI) payments and taxes. This is often referred to as “disguised employment”.
What is Disguised Employment?
To help here, we tend to refer to it as the “Friday to Monday” scenario i.e. if a worker leaves their permanent employment on a Friday evening but then returned to their same job at the same desk on a Monday morning as a Limited Company contractor – what would they be defined as under tax laws? As a Limited Company contractor, they would be paying far less tax.
Think of IR35 as a proposal between an employee and the client. It ensures an agreement exists between the employee and the client if an employee is directly hired by the client as an employee, not as a contractor through an intermediary (limited company). If caught by IR35 legislation, a company must operate tax in a very similar manner to that if the worker would be employed directly (i.e. Income Tax and National Insurance deducted via PAYE).
How do I know if my contract is caught under IR35?
Unfortunately, there is no black and white test of whether your contract falls under IR35 or not. Instead, we must rely on Employment Legislation and IR35 case law. We apply tests of the three “principles of employment”. These are:
How much control do you have over what, when, how and where the services are performed?
Is the work personal to you as the worker or could your Limited Company send someone else to work on this project?
Mutuality of obligation
Is the client obliged to offer you work and are you as the worker obliged to accept it? There are other factors that should be taken into account when reviewing IR35 status, including:
- Is the contract for a specific project?
- Is there financial risk in the contract?
- Do you provide your own equipment?
- Are you supposed to fit in to the client organisation as an employee? E.g. staff parties, use of staff canteen, staff training etc.
Knowing IR35 regulations in regards to your business isn’t always straightforward. It strengthens your contracting career to have those on your side who are available to help you through this process. Do not leave yourself open to professional trouble, financially or otherwise, due to misinterpreting any aspect of it.
To find out more, contact SG Accounting today.