What is IR35?
IR35 was first introduced by HMRC on 6th April 2000 to combat tax avoidance by Workers supplying their services via a limited company (‘Personal Service Company/PSC’), who, but for the PSC, would be considered an Employee (and pay increased levels of Income Tax and NIC’s as a result). IR35 is now 20 years old and continues to grow and grow in terms of its notoriety.
Effectively, such Workers were ‘disguised Employees’ and benefited from a net saving in tax of up to 25% when compared to a directly employed individual, including the ability to claim a number of tax-deductible expenses not ordinarily available to an Employee. The engaging organisation also benefits from significant savings as they do not have to pay employer NIC’s, nor do they have to offer any employment rights or benefits.
A Classic Example
Take the example of an Employee and a Contractor both earning £40k a year. The Contractor will take home nearly £5.5k more than the Employee. The End Client (employer) will also have in excess of £4k in employer NIC's.
IR35 is a complex matter. As part of our commitment to providing jargon-free law we have included a glossary at the end of this webpage including all of the key IR35 terms.
What factors determine IR35 status?
IR35 is determined by reference to the contract in place and the Working Practices. You cannot avoid IR35. HMRC use a number of factors when deciding if a Contractor falls within IR35, including: -
- Control – does the End Client tell you how, when and where your services must be performed?
- Personal service – do you have to personally provide the services or can you send a Substitute in your place?
- Financial Risk – if your work is unsatisfactory, are you obliged to correct it in your own time for no additional reward? Is there an opportunity to make a profit/loss?
- Length of Engagement – Have you worked for the same End Client on a long-term basis? Have you worked for other clients?
What if HMRC decides IR35 applies?
If a Contractor is deemed to be Inside IR35 (and therefore labelled by HMRC as a ‘disguised Employee’), the Contractor will have to pay income tax and NIC’s as if their contracting fee income was employment income and the PSC will face a financial penalty. Therefore, the potential liabilities for a PSC are huge. It is very important that they have a clear understanding of IR35 so as to ensure that they do not fall foul of it. However, this is by no means an easy task given that ever since its introduction, IR35 has been criticised as being highly complex and confusing.
An arrangement is likely to be caught by IR35 if, amongst other things, an individual provides their service to the End Client (or is obliged to do so); those services are provided under arrangements involving a PSC; and the circumstances of the arrangement are such that if they had been made directly between the End Client and the individual, the individual would have been held to be an Employee.
A number of important changes have been outlined in recent budgets, aimed at further removing the advantages of such relationships. In summary, the Government has put in place the following provisions:
From 2016-2017, the £2,000 National Insurance Contribution ‘Employment Allowance’ no longer applied to companies whose sole Employee is also the shareholder/director of the Company.
With effect from April 2016, tax credits on dividends ceased to be paid and dividends were made taxable at the rates of 7.5%, 32.5% and 38.1% for basic rate, higher rate and additional rate taxpayers respectively. The first £5,000 of dividends was made exempt from taxation.
Furthermore, the PSC would be liable to deduct income tax and NICs from travel expenses claimed for travel to and from any assignment where the individual is subject to direction, supervision or control by the Client.
The more recent introduction of the public sector IR35 rules also signalled a new found intent by the Government to close down what they allege to be widespread tax avoidance by those operating PSC’s, rules which, rather predictably, will now be extended to the private sector with effect from 6 April 2020, ensuring that the burden of responsibility for determining IR35 status and the risk of non-compliance moves away from the Contractor/PSC to the End Client.
Please click here to see our Complete Guide to the IR35 Private Client Sector Reforms. This comes into effect on 6th April 2020.
As such, it is more prudent than ever to ensure that any agreements in place contain the requisite precautions to avoid being caught Inside IR35 and incurring hefty interest and fines, in addition to the back payment of tax and NIC. Generally, the agreement between the parties will be the first place HMRC look to establish whether the arrangement leans towards an employment relationship rather than one of self-employment – it is the substance of the contract and the Working Practices which are of importance, not just whether the contract declares the individual to be self-employed.
At Attwells Solicitors, we are able to provide expert advice and documentation to Contractors so as to properly reflect their self-employed status, on a fixed fee basis. We offer real value for money and can review the agreements already in place and provide you with an assessment of such documents, as well as suggestions on any improvements which could be made. We are experienced in drafting new agreements for future use also, ensuring you and your business are protected as best as possible from the hefty financial penalties that can come from IR35 non-compliance.
How can Attwells assist you with your IR35 requirements?
We can offer expert advice and, in particular, offer the following services:
- Consultation meeting and letter of advice– we can meet with you, take your instructions and review your current working conditions and then provide you with a letter of advice setting out what steps to take going forward to best protect your business from IR35.
- Reviewing existing contracts and assessing status – Unlike our competitors, we do not just tell you the result of our review (i.e. whether you are inside/outside IR35), but also give the reasons for this determination, risk areas and what steps can be taken to strengthen (and possibly change) your position.
- Drafting new contracts – We will draft fresh contractors for your PSC, recruitment business or Contractors including all the relevant safeguards needed to protect your business. We will also provide advice around what mechanisms you can put in place, within the current day to day Working Practices, to further reduce the risk of IR35 applying.
How much will it cost?
Attwells Solicitors have particular expertise in relation to IR35 and employment law more generally, we will always offer you a quote based on the work you require. Our hourly rate is £250.00 plus VAT. However, we offer value for money fixed fees for standalone projects, in addition to cost effective retainers where long-term support is needed.
Retainer IR35 Legal Package
Price: From £400+VAT per month, subject to a minimum 12 month term.
What is included in the price:
- 1-2-1 support from our IR35 legal experts
- Unlimited telephone and email support, including all matters relating to IR35 and strategies on how to mitigate IR35 risks, including those relating to the incoming IR35 private sector reforms
- Bespoke IR35 contracts and documentation including but not limited to consultancy/self employed contracts, supply of workers terms and condition and sub-contractor agreements, in addition to all further employment and HR documentation (e.g. contracts of employment, staff handbooks, self-certification forms, appraisal forms etc.)
- Annual review of contracts and documentation so as to ensure ongoing compliance
- Face to face meetings, as and when required
- Bespoke letters covering SDS decisions and appeals, IR35 disputes and HR matters such as disciplinary/grievance investigations, hearings, appeals, dismissals etc.
- Management and mitigation of legal risks by designing and tailoring company policies and procedures
Retainer IR35 + Employment Tribunal Defence Package
Price: £100 +VAT extra per month, subject to a minimum 12 month term.
What is included in the price:
All of the above PLUS...
- Attwells' legal fees in defending any Employment Tribunal claims your business may receive
- Full legal representation at an Employment Tribunal
- Representation during ACAS Early Conciliation, helping you to secure a quick, commercial settlement at an early stage and avoiding the need for Employment Tribunal proceedings (where appropriate).
Attwells Solicitors have extensive knowledge in employment law.
Why should I use Attwells?
Lloyd Clarke, Partner, is an IR35 and Employment Law specialist. He has advised many contractors on their IR35 status over the years and has successfully put in place contracts and other safeguards for them so as to ensure they do not fall foul of IR35. Lloyd has acted in high profile matters relating to IR35, including representing a national TV presenter in challenging HMRC’s IR35 determination and works alongside Accountants and Tax Advisers in delivering cost effective IR35 advice to their clients. Attwells provide competitive fixed fees for IR35 advice, allowing you to know in advance what the full costs will be.
Agency: Recruitment Agency through which a Personal Services Company is engaged through to work for the End Client. Can be seen by IR35 as the Fee Payer.
Blanket Decision: The approach by an End Client to determine its Contractors and assignments collectively instead of making individual decisions.
Contractor: A person providing a services to a specific client (for the purposes of this article) via a limited company of their own, who is usually a director.
Deemed Employment: When IR35 applies, i.e. the contractors is Inside IR35, the earnings for the engagement of the intermediary will be in the form of deemed payment, also called the deemed employment payment – as they are deemed to be the income of the contractor.
Employee: An employee is an individual who is employed under an employment contract who is expected to work regular hours, expects payment & benefits, and has tax and NIC deducted from their salary. The employee is subject to supervision, direction and control.
End Client: The End Client is the party the contractor is engaged to deliver a service to. For the Public Sector HMRC gave a defined list for the End Client, for the Private Sector the definition of the End Client is still under consultation with further clarification expected in due course.
Equipment: Including heavy machinery, industrial vehicles or high-cost specialist equipment – but not including phones, tablets or laptops; vehicles – including purchase, fuel and all running costs (used for work tasks, not commuting. This also includes other expenses – including significant travel or accommodation costs (for work, not commuting) or paying for a business premises outside of the contractor’s home.
Fee Payer: The Fee Payer is defined as the business, agency or third party that pays the Personal Services Company (PSC), often referred to as a Limited Company.
Inside IR35: Inside IR35 means that HMRC deems a contractor as an employee and is therefore liable for income tax and National Insurance deductions at source. This is also referred to as In Scope.
HMRC: Her Majesty’s Revenue & Customs, the UK tax service.
IR35: The name given to the HMRC legislation that seeks to identify Disguised Employment.
Intermediary: An intermediary will usually be the contractor’s own Personal Service Company. They could also be a partnership, a Managed Service Company, or an individual.
Outside IR35: Outside IR35 means that a contractor is not classed as an employee and does not have the burden of income tax and National Insurance deductions. This is also referred to as Out of Scope.
Part and Parcel: Being Part and Parcel is the level at which the contractor is integrated and embedded within the organisation.
Personal Service: Personal Service is what differentiates a contractor from an employee. An employee is employed for them specifically, where as a contractor is engaged for their unique expertise, which can be replaced and should be devoid of ‘personal’.
Right of Substitution: Right of Substitution allows the PSC to send a replacement who meets the required criteria.
SDS: Status Determination Statement – An assessment provided by the End Client which declares the employment status of an assignment with the justification for reaching the deemed status determination.
Small Company Exemption: An exemption for End-Clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
Where the End-Client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the Personal Service Company and IR35+ does not apply.
Substitute: An alternative worker who undertakes work in place of the principal contractor, but is paid by the principal contractor.
Working Practices: The understood and inferred behaviours and engagement the organisation has with its contractors.