02 Nov IR35: Calling All Contractors
IR35 was a piece of legislation brought in by HMRC 12 years ago in an attempt to tackle tax and National Insurance avoidance schemes through the use of intermediaries such as partnerships or companies. HMRC’s view was that a large number of IT Consultants, Engineers, non-executive directors and one man companies were often treated as self-employed when in fact they should have been deemed employees of the client.
The legislation means that if you use an intermediary, but work for a client on terms which would have made you an employee if the client had engaged you directly, then IR35 will apply. Contractors who are in IR35 will be taxed as if they were employed (having to pay PAYE and NIC), which is typically around 20%.
HMRC has launched its new guidance Business Entity Tests for contractors, which explains their risk–based approach to checking whether taxpayers are ‘inside’ IR35. It is not entirely objective whether a contractor is ‘inside’ and depends on the terms and conditions in the contract, together with the contractors working arrangements. The guidance sets out 12 business entity tests.
Given the nature of contracting, each contract is likely to be different so here are some indicators to give you a better idea of what risk category you may be in according to HMRC.
- Business premises – Having a business premises which is separate from your home and the client premises = Pass indicator
- PII – Having professional indemnity insurance = Pass Indicator
- Efficiency – If you have the opportunity to increase your income by working more efficiently e.g. finishing a fixed price contract early = Pass indicator
- Assistance/substitution – Employing staff who bring in at least 25% of yearly revenue and can do the work = Pass indicator
- Advertising – Spending a significant amount on advertising = Pass indicator
- Business Plan – Having a business plan with a cash flow forecast = Pass indicator
- Client Risk – Being unable to recover payment for work = Pass indicator
- Repairs – The client paying for any mistakes incurred to the work done = Fail indicator
- Previous PAYE – If you were previously on PAYE and still do the same work = Fail indicator
- Billing – Not negotiating your payment terms upfront = Fail indicator
All contractors should be aware of IR35 and the best way to do this is by completing the tests (outlined above) yourself, as it is not always a simple case of black and white.