What is IR35?

There is a great deal of information available on this Intermediaries Legislation. Most of it is pretty confusing, so we’ll try to simplify things a bit for you. Let’s answer that all familiar question; What is IR35?

IR35 is only relevant if you work through your own Limited Company. If you work through an umbrella company, you can forget about it!

It was invented by HMRC who decided, many years ago, that some people working through their own company were actually employees in disguise and should be paying tax accordingly. This meant that anyone falling foul of the legislation (inside IR35) would have to pay tax through PAYE – income tax. A one man Ltd Co is both employee and employer, so employee’s and employer’s national insurance contributions are due too.

If the legislation doesn’t apply (outside IR35) then you can claim dividends from your Ltd Co. These do not attract national insurance contributions.

So, how do you decide if you are inside or outside IR35?

There are 3 main points to consider:

1. Supervision, direction and control i.e. does someone tell you what to do and when and how to do it? If they do – inside!

2. Mutuality of obligation – are you obliged to accept work and is the agency/client obliged to offer it to you? If the answer’s ‘yes’ – inside!

3. Right of substitution – if you can’t work for any reason would you be allowed to send someone in as a replacement? If the answer’s ‘no’ – inside!

HMRC have also published a set of tests which will help you decide whether you are at low, medium or high risk of being caught inside. These are called ‘Business Entity Tests’ or the new CEST test and you can find them here: http://www.hmrc.gov.uk/ir35/guidance.pdf.

Your actual status depends on what you do as much as what may be written in your contract. Some companies offer services to re-write your contract to make it compliant with IR35 – if it accurately reflects what you do that’s fine but if it bears no relation at all to what you do at work then you are likely to be in trouble in the event of an investigation by HMRC.