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Fact sheet 1 – What is IR35?

If you’re not directly employed by your client in a traditional sense, but you use an intermediary (such as a Limited Company) to provide your services to them, the intermediaries’ legislation – known as ‘IR35’ – may apply to you.

Under IR35, you have the burden of proving that you’re not using your Limited Company to disguise what is, in reality, an employment relationship with your client.

1. Why was IR35 introduced?

The amount of tax you pay depends on whether you’re working for your client via a Limited Company or as an employee. 

In order to enjoy the tax benefits of working as a contractor, some employees disguise themselves as a Personal Service Company. This way, they can divide their Income Tax and National Insurance Contributions between a salary and dividends – resulting in a higher take-home pay than a regular employee. 

So, by introducing IR35 in 2000, HMRC wanted to ensure that people were being taxed according to their true circumstances. In essence, IR35 determines if you’re:

a) A Limited Company contractor; or 

b) An employee.

As a Limited Company, you shoulder complete responsibility for paying the right amount of tax. 

2. Are you a contractor or an employee?

When your client engages you to provide them with services through your Limited Company, you need to work out if you’ve simply replaced a previous employee.

If so, the chances are that your contract is caught by IR35 because your Limited Company is, for all intents and purposes, masking your duties as an employee. 

3. What does an ‘IR35-friendly’ contract look like?

The main feature of an ‘IR35-friendly’ contract (one that is outside IR35) is that you control and direct your work. 

So, whether you draft your contract yourself or have it prepared by an IR35 specialist, it should include the following clauses to ensure that it isn’t caught by IR35:

 

  • Control and supervision: you should be in charge of your working situation, such as start and finish times, lunch breaks, etc.
  • Substitution: you should be able to draft in a third party to perform services for the client on your behalf.
  • Payment: you must invoice your clients in order to receive payment (rather than being paid automatically through a payroll system).
  • Exclusivity: your contract shouldn’t prevent you from working with other clients. 
  • Liability and insurance: as an independent contractor, you’ll be liable if your work isn’t up to scratch and doesn’t meet your client’s expectations.

 

4. How can you find out your IR35 status?

If you’d like an IR35 assessment, contact us today to arrange a review of your circumstances.

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