IR35 (also known as ‘Intermediaries Legislation’) is anti-tax avoidance legislation which targets individuals who ‘disguise’ their employment status using an intermediary – typically a limited company.
If HMRC deem you to be a ‘disguised employee’, then you could pay up to 25% more in tax, annually – is it therefore very important that you understand the IR35 rules to avoid getting caught out.
Operating as, or providing services through an intermediary carries the following benefits:
Worker: Pay’s tax based on the lower dividend tax rate and pays the minimum amount of National Insurance necessary to qualify for state benefits upon retirement – saving up to 25%.
Engaging party/’employer’: Does not have to pay Employers National Insurance contributions or provide employment benefits e.g. workplace pension.
HRMC will apply certain ‘tests’ to determine if an individual is using an intermediary to disguise employment – unfortunately, it is often that many individuals who are genuine contractors or freelancers outside of employment, are deemed ‘employees’ by HRMC, and suffer financially as a result.
When HMRC apply their ‘tests’ for employment, they will disregard any written contract which may exist between the engaging party and the contractor – instead HRMC will focus on the specific circumstances and nature of the working relationship and use this information to imply the true terms of the working relationship (known as a ‘notional contract’). Determining the legal status of a notional contract often involves specialist knowledge employment law and accordingly, mistakes have been made by HRMC in the past in correctly determining the status of working relationships – this is primarily caused by knowledge gaps and lack of expertise across the organisation. IR35 can therefore result in genuine one-person small businesses being incorrectly badged as an employee by HRMC.
The three primary tests of employment are:
Control – to what extent does the performer of the work have control over ‘what’, ‘how’, ‘when’, and ‘where’ the work is performed?
Substitution – can the performer of the work substitute another person to perform the work in their place, or does the performer have to complete the work themselves?
Mutuality of obligation – mutuality of obligation exists where the engaging party is obliged (required) to provide work, and the performer of the work is similarly obliged to accept the work.
HRMC might also consider; the level of financial risk you take; whether you provide your own equipment (if necessary for the job); whether you are in business on your own account, and; whether you are deemed ‘part and parcel’ of the of the engaging organisation.
‘Part and parcel’ in the context of IR35, effectively means to be ‘part of the engaging organisation’. HRMC can take a different view to that of a court on whether an individual is part of the engaging organisation and there are broad discrepancies in the existing case law. Whilst the ‘Part and parcel’ determination is likely to be a secondary assessment used by HRMC, they can use this assessment to challenge your working status – the key is to avoid it getting this far. There are a number of things contractors & freelancers can do to avoid HRMC making an IR35 challenge on the basis of the ‘Part and parcel’ argument in the first place. Contact us today to get advice on the steps you can take and find out how to protect yourself against IR35.