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Formally known as the “Intermediaries Legislation”, IR35 is the shorthand name given to the laws introduced in April 2000. Named after Inland Revenue’s (now HMRC) 35thpress release, the legislation distinguishes genuine contractors from “disguised employees”, and taxes the latter accordingly and as though they were in full time employment.
The law came at a time when an apparent epidemic of full-time employees were leaving their positions only to continue doing the same jobs in a self-employed capacity. Much concern from both political and media bodies was voiced, criticising employers for avoiding Employer’s National Insurance Contributions, whilst also condemning individuals from taking advantage of the friendlier corporate tax rates in order to reduce personal taxes. A win-win situation, no doubt, for those in employment, but a ruinous one for the government.
And so, the implementation of IR35 came with humble and sincere beginnings. The premise was simple: apply a set of tests to contract roles to determine whether the individual in question was in business on their own account providing services to a client, or was really an employee of the end client.
In the event that the individual was found to be operating in an untoward manner, whereby their job situation was essentially a permanent role, he or she would be required to pay the same taxes as those in full-time employment – specifically, paying Income Tax and National Insurance on all income from the money earned as a result of that job.
However, it was a case of easier said than done, as IR35’s good intentions were outweighed by the lack of clarity and direction delivered by Inland Revenue (its reputation certainly did not improve after its change to HMRC). Plagued by poor communication, misunderstandings, and panic coming from thousands of contractors, accountants and umbrella companies, it’s no wonder that confusion came in the way of solutions.
But first, who is affected?
The Intermediaries Legislation has a certain audience – individuals working through what is termed as an intermediary. So, IR35 does not affect you if you are:
- A payroll employee at the organisation in which you work, even if it is on a fixed term contract. All your tax liability is subtracted on a PAYE basis before having your take-home pay deposited into your bank account.
- Completely self-employed. If you are operating as a sole trader, all of your earnings from contracting must be declared on a Self-Assessment Tax Return to be evaluated for Income Tax and National Insurance. In this instance, IR35 will not apply to you as you are not trading through an intermediary. In theory, this practice is rare due to the ban on agencies from engaging with contractors, and because end clients often tend to avoid sole traders due to the relationship often being misinterpreted as de facto employment.
- Contracting through an umbrella company. As an employee of an umbrella company, even if you are simply working through one, you are subject to PAYE on your income documents. Often is the case that umbrella companies advertise themselves as “IR35 compliant”, which is misleading due to the fact that IR35 simply does not apply to umbrella employees.
Therefore, only those working through an “intermediary” as per the legislation are subject to IR35. The rules apply if you are operating via:
- A limited company (Personal Service Company – a PSC)
- A limited liability partnership (LLP)
Individuals found to be working through either of those structures will be required to consider how the Intermediaries Legislation impacts any employment opportunities taken, and if it is necessary to rearrange affairs accordingly. A PSC is the most common form, and so this guide will address the nature surrounding PSCs in detail; the information, however, applies equally to LLPs.
Remember that IR35 does not apply to companies or individuals, but rather to the employment relationship or engagement specifically, referring to the individual contracts. Each role ought to be assessed in terms of both contractual agreements and the actual working environment and protocols that need to be followed.
A simple question to ask yourself is: how would you define the working relationship if the PSC wasn’t in use? It is a matter of working “inside” and “outside” IR35 – a case of being in “disguised employment” versus a contractual agreement between two companies.
What does it mean to be ‘inside’ IR35
Any payment made for a role within the realms of IR35 is classed as a “deemed direct payment”, where the assumption from HMRC is that a salary payment for an individual completing the work is taxed accordingly. The practice, however, differs between the public and private sectors.
