IR35 is a piece of tax legislation that was introduced in April 2000 with an aim to stop what HMRC calls “disguised employment”. The idea was to increase the tax paid by people who set up their own Limited Company when they were clearly an employee of their client.
You are “inside” IR35 if you work for a client through your own Limited Company either directly or via an agency and the terms of the contract either on paper or your real world working conditions are such that in reality you are really an employee of the client.
The main issue is to figure out if you are really ‘employed’ or ‘self-employed’. As every case is so different, HMRC has not set out a statutory definition of employment, therefore they will look at both your contract and your working conditions to see if you are inside IR35.
One of the best things to do is get your contract reviewed. This will give you a very strong idea of if your contract is inside IR35 and the changes that need to be made so that it is not. We offer a contract review service that we recommend all contractors and freelancers take up.
In reality HMRC has found it very hard to enforce IR35. Many contractors are willing to take cases to court and more often than not they win. We would urge all contractors to see IR35 as something you need to learn and understand so that you can take steps such as having your contract reviewed to ensure you are not inside it. This could save you a lot of time, hassle, stress and money in the long run.
The ten key points of IR35 are detailed below along with what you can do to try and ensure you are outside of IR35.
How much control and how much direction do your clients give you?
What work is carried out - does your client have the right to move you from one project to another as an when they like, this would indicate employment.
When the work is carried out - If your client controls the hours that you work then this is an indicator of employment
Where is the work carried out - do you have to go to the client’s business to carry out the work or do you have the option of working where ever you like? If you have to work at a client’s premises this would indicate employment.
How the work is carried out - does the client give you detailed instructions on how they want then work to be undertaken, not just a brief spec but they tell you exactly what to do? If they do then this is a big indicator of employment. They should not be telling or teaching you how to do your work.
you need to ensure that your paper contract and your real world working conditions are as flexible and free as possible from any kind of control. If you can work from home and turn up at the client’s office at 11am when all their employees must be at their desks for 9:00am sharp, and if you can decide which days you work and have complete control over the project, this will all help to ensure you are not inside IR35.
This is quite a simple one, to be employed you can usually not substitute yourself with someone else and get them to do the work for you. Therefore if you have the right to substitute, i.e. if you took on a contract with a client and could take on a contractor to do the contract for you, then you have the right to substitution - this would be strong grounds for self-employed status.
you should have the right of substitution in all your contracts. It is also a good idea to state that the client will always be paying your company the fee and your company will be paying any substitute used.
If you work for a client and provide all of your own equipment e.g. you’re a graphic designer and you use your own Apple Mac and adobe design suite then this is a big sign of self employment. If you go to the client’s business and they provide you with their equipment, this is a sign of Employment.
pretty simple answer here, provide your own equipment. By doing this you are showing a certain degree of investment and financial risk involved on your part - running a business.
If you have invested in your own equipment to satisfy the ‘provision of equipment’ factor then you are also going some way to dealing with the financial risk element. There is always a degree of financial risk in business and by purchasing your own assets or by taking on employees or sub-contracting work to a substitute you are showing that you are taking on financial risk.
You can purchase your own assets, work to fixed price contracts - if something goes wrong then you bear the financial risk of fixing it, to this end you should also buy professional indemnity insurance, showing you are prudent about the financial risk.
People who are self-employed usually charge a fixed rate for a project or contract where as employees get paid a fixed amount for a period of time. They may often get paid overtime as well.
Try to charge a fixed price for a contract, however if this is not an option make sure you issue your own invoices, do not use time-sheets. Also when charging expenses to the client put these on your own invoice and keep the receipts, do not give them to the client and fill out their usual expense form for their employees. You need to think and act like you are your own business, don’t use words like overtime, as you’re not trying to be an employee.
If you have been working for the same client for a long time or if you have regular work from the same client then this may show that you are an employee - it is not conclusive but if coupled with lots of other factors pointing to employment, it could mean you’re caught by IR35.
Try to have more than one contract on the go at any one time, if you have one major contract lasting for a year or more, try to take on smaller contracts to run at the same time. Do not sign a contract that states you can not work for anyone else - this points to employed status.
Does an obligation exist between you and your client? If your clients pay you for your services and no other obligations exist between you then it is possible that Mutuality of Obligation does not exist and therefore you are not employed.
This is more difficult for very long contracts but you should ensure that each contract sets out exactly what you and your client expect from each other.
This is quite a simple one - do you look like you’re running a business or do you look like an employee of your client? You need to think and act like you are running your own business in everything you do.
Like many of the other issues, you should have your own assets and equipment, try to work from you own office when you can even if this is your home. Work for more than one client. Get stationery made with all your business contact details - don’t go to the office Christmas party for the employees.
It is important that your client sees you as a contractor - a separate business to theirs. If you were to get investigated by HMRC they may ask your client how you are viewed, if they say you are basically part of their organisation this will point towards you being an employee.
Then main thing to do is not to act like an employee, you have to have the mindset of running your own business - that is what you’re doing. Don’t let them put you on their internal phone system or give you an internal email address - use your company email address. You should not be managing the employees of the client and as we said before, don’t go to the office Christmas party for the employees, unless lots of the clients suppliers are invited as well.
If you were to get investigated, HMRC would look at all of the points to try and prove you were inside IR35. You need to try and make sure that as many as possible point towards self-employed status rather than employed. Many of them are quite easy to do anyway - get business cards made, a website and company email, work from home and ensure your contracts are as free as possible - get each contract reviewed!
If you are inside IR35 rules, then we have to work out what is called your ‘deemed salary’ for this you may claim certain expenses but not as many as if you were outside IR35.
- Employers National Insurance Contributions
- Employer contributions to approved pension schemes
- Professional subscriptions
- Professional indemnity insurance
If your contract is inside IR35 then you have to pay HMRC the PAYE and NIC calculated on your deemed salary. HMRC have said that this can be paid at the end of the financial year with the final PAYE payment on the 19 April. You must inform us if you believe one of your contracts is caught by IR35 and your deemed salary needs to be calculated.
We would recommend that you have all your contracts reviewed.
Through our 123 Extra program we have set up a specialist partnership to offer a full IR35 Contract Review Service. HMRC takes into account whether or not you had your contract reviewed when applying penalties and fines, it is a service that we recommend to all clients.
If you want complete piece of mind that you are covered for all possible tax liabilities then full tax protection insurance might be best for you.
For more info please email, firstname.lastname@example.org or call the 123 Contracting office on 0845 834 0269.
This information is for general information only. We take no responsibility for any action taken or refrained from in consequence of its contents. Always seek our professional advice specific to your circumstances before acting.