What is IR35?
IR35 was first introduced by HMRC in 1999 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).
Effectively, such workers were ‘disguised employees’ and benefitted 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.
What factors determine IR35 status?
IR35 is determined by reference to the contract in place and the working conditions. You cannot avoid IR35, nor can you or your end client determine your IR35 status. 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 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 labelled by HMRC as a disguised employee, the contractor will have to pay income tax and NIC’s as if their contracting fee income were employment income and the personal service company will face a financial penalty. Therefore, the potential liabilities for a PSC are huge and 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.
Therefore, An arrangement is likely to be caught by IR35 if, amongst other things, an individual provides personal service to the Client (or is obliged to do so); those services are provided under arrangements involving a Personal Service Company; and the circumstances of the arrangement are such that if the arrangements had been made directly between the Client and the individual, the individual would have been held to be an employee.
A number of important changes have been outlined 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’ will not apply to companies whose sole employee is also the shareholder/director of the Company
With effect from April 2016, tax credits on dividends will cease to be paid and dividends will be 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 will be exempt from taxation.
The Company will be liable to deduct tax and National Insurance Contributions 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 April 2020, ensuring that the burden of responsibility for determining IR35 status and the risk of non-compliance moves away from the contractor to the entity that pays them.
As such, it is more prudent than ever to ensure that any agreements in place contain the requisite precautions to avoid being caught by IR35 and incurring hefty interest and fines, in addition to the back payment of tax and NI. 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 arrangements in practice 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 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 and work alongside local accountancy firm ‘An Accounting Gem Ltd’ to provide a full service for your business in respect of your legal and accountancy needs.
How can Attwells assist you with your IR35 requirements?
We can offer that advice and offer the following services:
- Consultation 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 your position.
- Drafting new contracts – We will draft fresh contractors for your PSC including all the relevant safeguards needed to protect your business. We will also provide advice around what mechanisms you can out in place, within the current day to day working practices, to further reduce the risk of IR35 applying.
Why should I use Attwells?
Lloyd Clarke, Partner, is an IR35 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.