IR35 is a tax legislation introduced in 2001. Its purpose is to ensure that those individuals who work through a limited company and who therefore treat a portion of their income as salary and a portion as dividend are entitled to do so. This largely depends on whether you are employed or self employed.
There are no hard and fast rules on this and it is initially the Tax Inspector and ultimately the courts, to consider each case that comes before them. As the legislation is still new, there are relatively few court rulings to help us, so the best you can do is to take reasonable precautions to consider whether the legislation could affect you. If the HMRC decides that you should be considered as “employed”, then you would potentially be liable for the tax that should have been paid had all your income been treated as subject to PAYE and NIC. This is largely the PAYE and NIC that you saved by working through your limited company. You could also be charged interest on the amount you have been found to have underpaid – and possibly penalties as well.
How do I decide if I’m self-employed for IR35 purposes?
Unfortunately, this is far from simple as there are so many possible interpretations that can be put on how you work, as each assignment can differ. However, there are some pointers that can help.
If you answer yes to any of the following questions, you are most likely not operating as a self-employed person for the purposes of IR35.
The ‘client’ means the business you are providing your services to.
Does your contract state that you are an employee of the client?
Is it intended that you should become an employee of the client?
When you commence your assignment, do you have good reason to believe it will be for a long period (say over 19 months) of time?
Does the client usually request you provide services through your limited company?
Are you a member of the client’s pension scheme?
Does the client pay you sick pay if you are off work? Does the client pay you holiday pay?
Are your terms and conditions the same as the permanent employees of the client?
Does the client give you a company car or van?
Have you the authority to hire and fire the client’s staff?
Does the client have an obligation to offer you regular work?
Do you have to accept work from the client if you’re offered it?
Are you eligible for redundancy notice or redundancy payments from the client?
Do you use the client’s letter headings and business cards, and claim expenses on the clients claim form?
It will help your case for self-employment for IR35 purposes if you can answer yes to the following questions:
Could you (or your agency) find a substitute to undertake your work if you cannot undertake the work yourself?
Having been allocated your assignment, you are given reasonable freedom as to how you complete it?
Do you take any financial risk and use your own equipment on each assignment?
Is your contract for as long as your services are needed, rather than for a fixed period?
Do you regard yourself as being independent from the client and do permanent employees of the client regard you as independent from the client?
If the Inspector challenges your interpretation of how you work and how your tax should be assessed, you have two options. You can either accept this ruling or pay the tax that the Inspector considers that you owe, and any interest and penalties that may be imposed, or you can challenge his opinion by taking the case to court.