What is IR35?
IR35 is the name used for the Intermediaries Legislation, but it is also often referred to as the ‘off-payroll working rules’.
Essentially what this law aims to do is to make sure contractors who work as employees pay the appropriate tax and National Insurance Contributions (NICs) as a normal employee would. In many cases, contract workers will provide their services through an intermediary like their own limited company but the nature of the work should be, in the taxman’s eyes, considered employment.
HMRC calls these people ‘disguised employees’; they’re carrying out work and behaving for their client like a member of staff would while benefiting from the tax advantages delivered by payment by a salary and dividend mix.
If you’re caught out by IR35, you’ll be required to back pay almost exactly the same amount in income tax and NICs that an employee would for the time you were under contract. There’ll be fines and interest on top of that too and for the remainder of the contract, you won’t be taking home as much as before once tax and NI have been deducted.
How does HMRC determine your employment status?
When looking into a potential IR35 related case, HMRC inspectors will try to determine whether a contractor working through their intermediary is considered a third party providing a service to a client or whether they are in fact operating as an effective employee for the client.
Of course, you will almost certainly already have a contract in place with your client stating that you are in fact a contractor. However, this will be completely discarded for the purposes of HMRC’s investigation, with inspectors creating their own “hypothetical contract” based on what they can see of your actual working relationship with the client.
Once drawn up, this hypothetical contract will then be used to work out whether the relationship between you are your client looks more like an employment contract or an official B2B transaction. If it is the latter, IR35 will not apply.
This is done using HMRC’s three main ‘tests of employment’, which are:
- Control – Whether the client or the worker decides what, when, where and how work is completed.
- Substitution – If the worker is personally required to carry out the work or if they are able to send a substitute in their place.
- Mutuality of obligation – If the client is obliged to offer work and if the worker must accept it when they do.
HMRC will then make their ruling depending on whether or not they consider you to be an employee of your client. If they do, you will be given the opportunity to appeal the decision before a tribunal – which is exactly what happened in the case of Mr Daniels.
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