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IR35 is the UK tax legislation designed to tax 'disguised employment' at a rate similar to employment. In this context, 'disguised employees' means workers who receive payments from a client via an intermediary company. However their relationship with their client is such that if had they been paid directly they would be employees of the client.

 

IR35 is considered to be one of the main pieces of legislation affecting both contractors and freelancers, as its implications affect the way in which remuneration is paid and taxes are assessed.

 

Example

 

An employee would leave his employment on a Friday afternoon and return to work the following Monday to do the same job for the same company but not as a direct employee of that company. Instead he would now be employed by an intermediary (a personal service company of which he would be a controlling shareholder/director) through which his services would again be supplied to the original employer. The intermediary would invoice the original employer for these services and would receive payment for them.

 

 

Through coming to the above arrangement, the original employer would avoid paying Class 1 NIC at 13.8% and the (former) employee could arrange his payments between salary and dividends in order to minimise his tax and NI liabilities. To counter this problem the government introduced anti-avoidance legislation known as IR35 in April 2000.

 

Scope

 

IR35 legislation applies to individuals who provide their services through an intermediary, (usually a personal service company) where the income received for performing the services would have been treated as employment income had the individual contracted directly with the customer (without the intermediary). The HMRC tests are used in deciding if someone is employed or self-employed and therefore whether an engagement is correspondingly exempt or caught in the IR35 legislation.

 

IR35 is an area requiring full familiarity with HMRC requirements.  EBS Voisey & Partners are skilled in assisting both companies and individuals in assessing the IR35 status of any particular engagement.  This assessment will include the particulars of the contract and the working requirements involved in the execution of that contract.

 

The main areas for consideration include, but are not limited to:

 

  • Right of Substitution

  • Mutuality of Obligation

  • Right to Control

  • Provision of Equipment

  • Financial Risk

  • Basis of Payment

  • Client Integration

 

The existence of just one of the above indicators would not be conclusive in determining IR35 status. Further indicators, based on discussion, are required.

 

While helping to assess IR35 status, EBS can also provide direction to qualified professionals for guidance in producing contracts which will clearly define IR35 status for both companies and individuals.

 

Implications

 

If an engagement falls within the scope of IR35, (if the client determines that their contract is caught by the legislation following professional review of the above tests), they are required to receive the majority of their income (less a few qualifying deductions) as salary - this is referred to as their IR35 'deemed salary'.

IR35 Legislation

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