IR35 - Are you In or Out?

This week I have invited Kevin Ball to talk about  IR 35. In my discussions with business owners and contractors this remains an important but misunderstood issue. Kevin I think provides a clear explanation. Over to you...

IR35 legislation is a common bugbear for a lot of self-employed people. It is often criticised for being vague, intrusive and overly complicated. Despite this, UK Chancellor George Osborne made it clear in his December 2012 statement that IR35 is here to stay; so what is IR35 and why does cause so much bother?

IR35 is a piece of legislation that HMRC use to determine employment status. It is of most concern to independent contractors and the businesses that hire them.  It was originally introduced to combat situations where people would pose as independent contractors for tax purposes whilst still enjoying all the benefits of being an employee.

HMRC will consider anyone who is an employee as “inside IR35” and anyone who is genuinely independent as “outside IR35”.  If you are outside IR35 you will pay corporation tax instead of PAYE and NI; this is a far lower rate of tax so it is important for contractors to stay outside IR35.

Typically, if a contractor is outside IR35 they will:

·         Be capable of working on their own

·         Be financially accountable for their work

·         Provide their own equipment

·         Receive no employee perks such as pension contributions or sick pay

If a contractor is unable to display the above then it is likely that HMRC will consider them to be inside IR35 and an employee of the business that has hired them; they will also be expected to pay regular levels of income tax. If HMRC launch an IR35 investigation, and it is found that a contractor has been paying tax outside IR35 whilst working inside IR35, then HMRC can demand anywhere from 30-100% of the tax avoided back depending on whether the avoidance is deemed to be accidental or negligent.

Flowchart on behalf of The Accountancy Partnership

The importance of IR35 awareness for contractors is obvious but it should also be important for any businesses that use contractors. Businesses must make sure that the contracts they are offering are outside IR35 in order to attract the most astute and honest contractors they can.

Checking for IR35 Compliance

HMRC offer a business entity test that contractors can take to ascertain where they are with regards to IR35. After completing the business entity test the taker will be awarded with a score that corresponds to either a high, medium or low risk of being inside IR35 and therefore investigated; anyone achieving a low risk rating is unlikely to be investigated at all. The questions in this test should also give any businesses hiring contractors a good idea of what they should, and should not include, in the contracts they draft. If there is still uncertainty then employment law experts and contractor accountants can review any contracts before i’s are dotted and t’s are crossed.

IR35 can certainly be a tricky piece of legislation but with the proper research it shouldn’t be the headache it is often portrayed to be.