IR 35

IR35 refers to Government legislation first discussed in the budget of April 1999. The term IR35 comes from the name of the Inland Revenue press release number 35, which first proposed the legislation. IR35 has been devised to tackle the avoidance of tax and national insurance contributions (NICs) through the use of intermediaries (ie. limited companies and partnerships). Companies can be set up to provide services of a single worker to a client. Where had the worker been in direct employment, he or she would be considered as an employee.

The purpose of it is to force these individuals to pay income tax (PAYE) and national insurance (NI) at rates comparable to ‘normal’ employees. Under the legislation, the onus is on the director of the personal service company to decide whether a contract “passes” or “fails” IR35. For any contract that “fails”, tax and NI is calculated according to the IR35 rules.

The rules are not intended to prevent workers from providing their services through intermediaries. However, they will help to discourage the practice of routing engagements through intermediaries simply in order to take advantage of a tax and NIC's regime which may be more favourable than that which would apply if the worker were to be taken on as a direct employee of the client.

Many contract companies generally have a mixture of IR35 and non-IR35 taxable income. Income that does not fall under normal contracts is not IR35 taxable.

Accordingly the Inland Revenue is entitled to look at the contracts and all the working arrangements on the hypothetical basis that the arrangements between the individual and the client were direct, without including the intermediary or any third party. All the working arrangements are relevant. Of primary importance is the work and nature of the work, and the contracts, which the personal service company enters into either direct or through an agency, only serve as supporting evidence – although that supporting evidence can often be strong. If the engagement would have been one of employment if it were not for the existence of the intermediary, the tax is payable by the intermediary.

Currently it is estimated that up to 85% of IT contractors fall under the new rules. This means that it is now more difficult and less beneficial (financially) for Contractors to work under a limited company structure. The Inland Revenue will test each individual contract to determine which category a contractor falls under. There are two possible results: a) a genuine contractor or limited company or b) the contractor is deemed to be “akin to employed”.

• if workers are a genuine contractor, i.e. they passed the IR35 test, they can continue to pay themselves a small salary and take the rest of their income in the form of dividends. Dividends do not incur National Insurance Contributions.
• However, if workers fail the IR35 test and are deemed 'akin to employed' they can no longer take advantage by setting a very small salary and having dividends from the company. That can result in a reduction of take home pay of up to 15%.

At Accounting Freedom we can help you in a number of ways:

1. by advising on whether your current contract will pass or fail IR35.

2. by advising you on ways to operate in the future to guarantee not being caught by IR35.

3. Even if you fail IR35, we can help structure your business in the most tax efficient way, within the regulation, to maximise your take home pay.

Below is a link to the Inland Revenue page on IR35.

www.inlandrevenue.gov.uk/ir35/pressreleases.htm

If you have any queries about IR35 or you would like to know more about any of our services and how we can help you, please e-mail us on info@accountingfreedom.co.uk or call us on 01322 319 341