What is IR35 and Why Does It Matter?
IR35 is the name of a specific tax legislation implemented by the UK Government and managed by HMRC. The legislation was introduced to identify individuals who try to avoid paying the tax that they should on their income. Introduced in April 2000, IR35 seeks to tax ‘disguised employment’ for those working through intermediaries – typically their own limited company. IR35 is specifically relevant to contractors, freelancers and sole traders as it means that HMRC do not recognise the title ‘self-employed’ from a taxation perspective and therefore you might be taxed the same way that a full-time employee is where you would then fall inside the legislation rules.
Does IR35 affect you?
If you provide any sort of service to a client, you need to be aware of IR35 and how it might apply to you, especially if you:
- Personally perform services (e.g. web development or IT contracting) for a client
- Work through an intermediary, such as a Personal Service Company
- Do not have an employment contract with the client
- Were it not for the intermediary, you would be regarded as an employee of the client
Should HMRC determine that you are “inside IR35”, then the IR35 rules will apply to the income you earn, effectively taxing it at a similar level to regular paid employment.
Can you avoid IR35?
If you are a contractor and you do not wish to be taxed under the IR35 rules, you may need to adjust your working practices, so that you qualify as “outside IR35”. You will need to consider issues such as:
- Control: Are you free to work as you choose, or is the client directing your every move?
- Benefits: Do you receive holiday pay, sick pay or pension contributions? These all need to stop if you are to be considered self-employed in the eyes of HMRC.
- Substitution: Does your contract permit you to use somebody other than yourself to perform the services your company has been hired for?
- Equipment: Do you use your own equipment to perform your services, or do you depend on the client to provide it?
- Termination: Do you have a fixed notice period, similar to that of an employee, or do you have termination clauses more consistent with that of a company providing services?
- Financial risk: Are you invoicing the client for your services, and accepting the financial risk that they may not pay you?
All of these parameters should be reflected in your working practices and any contracts you are asked to sign. If you have any doubts at all, seek professional advice.