What is IR35 and How Does it Affect Me?
IR35 is the common name given to a piece of tax legislation introduced in 1999. Broadly speaking, it gives HM Revenue and Customs the power to treat some contractors as though they are actually employees for tax purposes. This can have a dramatic impact on these individuals’ incomes.
The purpose of the legislation was to combat so-called ‘disguised employment’. The Nineties saw an epidemic of highly-paid employees trying to minimise their tax bills by branding themselves as consultants, and claiming to be self-employed. While IR35 did indeed help to eradicate this, it also caught tens of thousands of genuine contractors, threatening their financial position.
What is the financial impact?Contractors who fall ‘inside’ IR35 can see their take-home pay reduced by as much as 24 per cent. This is because contractors inside IR35 are unable to take advantage of all of the expenses and allowances to which they are entitled.
Those within IR35 often use an ‘umbrella company’ to operate their payroll. They will have to pay Employers’ National Insurance Contributions, which are avoided by those who fall outside the legislation.
Am I inside IR35?Part of the problem of IR35 is that it is very difficult to determine whether or not you stand to be caught by the legislation. There are, however, a number of particularly common problems and mistakes that will generally lead to a contract being deemed to fall within IR35.
- Control. Contractors must be able to choose their own hours and place of work. If your contract with a client commits you to set hours, or requires you to work when the client asks, you run a high risk of falling within IR35.
- Mutuality of obligation. Under an employment contract, the employer is obliged to provide work and the employee is obliged to complete it. A contract between a contractor and client should specifically state that there is no such “mutuality of obligation.” Again, failure on this front will often lead to a contract falling within IR35.
- Right of substitution. Contractors should be able to provide a substitute to complete the work, at their own expense. The client pays for a service, not for your employment. If your contract personally names you as the individual who must carry out the work, it is likely to fall within IR35.
How do I stay outside IR35?Careful drafting of a contract is paramount if you are to remain outside IR35. You must ensure that the contract makes clear that the client is paying for specific tasks to be completed; where possible, a schedule of work should be attached.
Your working patterns will also be taken into consideration in the event of an investigation by HM Revenue and Customs. So, make sure that you do not act like an employee; regular working hours should generally be avoided where possible, for example.
IR35 remains a significant problem for all genuine contractors. If you are to avoid being affected by this potentially very damaging legislation, it is vital that you plan ahead to ensure that your contract passes IR35.