Easy Guide to IR35
What is IR35? IR35 is the common term for the intermediaries legislation, which came into force in 2000. It is a piece of tax legislation which aims to level the playing field between those working through their own limited company, and those working as a permanent employee. The legislation intends to differentiate those working as a genuine contractor via their own limited company, and those using a limited company for tax purposes with the working conditions of an employee. Key terms to remember: Disguised employee a limited company contractor using their limited company for tax benefits they are not entitled to Genuine contractor a limited company contractor operating as a business
IR35 Statistics Estimated number of PSCs 2011-12: 200,000 2012-13: 265,000 Approximate number of people who paid tax under IR35/paid a deemed payment, in 2011-12: 10,000 This is only an estimated 10% of those who should have paid tax on at least part of the income their PSC receives under the legislation. 430m 520m 550m Estimated cost to the Exchequer of noncompliance with the legislation in 2015: 430 million Estimated amount of tax receipts protected by deterrent effect of the legislation in 2010-11: 520 million Estimated cost to Exchequer of not having IR35 legislation: 550 million a year
004 Specialist IR35 compliance teams 250 Number of enquiries HMRC operations are committed to tackle at any one time 542 2009-2014 Total number of IR35 enquiries / enforcement actions 2009-2014 3,104,000 Total IR35 yield from enquiries / enforcement actions HMRC (2015) IR35 FORUM MINUTES 11th February 2015. [online] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417460/ir35_forum_minutes_-_11_feb_2015.pdf HMRC (2015) Intermediaries Legislation (IR35): Discussion Document. [online] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/446242/intermediaries_legislation_ir35-discussion_document.pdf HMRC (2015) Estimating the administrative burden of IR35 and the cost of abolishing it. [online] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/411583/estimating_the_administrative_burden_of_ir35_and_the_cost_of_abolishing_it.pdf HMRC (2013) IR35 FORUM MINUTES 29th April 2013 [online] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/287097/ir35-forum-minutes-29-apr-13.pdf
How does IR35 Work? The Status Tests IR35 is based on historic case law, meaning that the tests used have been derived from past court rulings. There are a number of tests which are used to determine whether you are operating as a genuine business or not including whether you take a financial risk or are considered part and parcel with your end client s organisation, however there are three main tests; 01 Personal Service / Right of Substitution 03 Mutuality of Obligation 02 Control
01 Personal Service / Right of Substitution This test has been considered one of the most important since the case of Chaplin v Australian Mutual Provident (1978). It suggests that as a business, you should not have to provide the contracted services personally, and should have the power of unlimited delegation. This means that a contract should not be based solely on you providing the work personally. As a business, you should be entitled to provide a substitute worker to undertake all or part of a contract you have secured. Your company would maintain responsibility for the contract, substitute worker, and their payment. 02 Control 03 Mutuality of Obligation This test encompasses the what, where, when, and most importantly, how you complete the contract, shown in the case of Morren v Swinton and Pendlebury Borough Council (1965). As a contracted specialist, you should have a reasonable degree of control over your methods of work. Consider the common analogy of a plumber or electrician who has come to fix something in your home; you wouldn t tell them how to fix your boiler as you hired them for their knowledge and capability. You may not find any indicators of this point in your written contract, but more in your working practices so ensure that your client agrees with the fact you are in full control of how you complete your services. This test is that of an expected source of work. As a contracted business, there should not be any expectation of further work, and the client should not be expected to provide it. Judge Howard Nowlan in the 2011 UKFTT case of JLJ Services Ltd v HMRC, suggested that more focus should be placed on non-mutuality of obligation, meaning the ability to walk away from a contract. A clear start and end date to each contract and contract renewal is essential, as without these definitive timescales of your relationship with your end client, the Revenue may take the view that there is a presumed continuation of the contract. Key terms to remember: Written contract the terms of agreement laid out between the contractor and end client / agency Working practices the ways in which a contractor operates their business in relation to the IR35 status tests / the day-to-day working relationship between the contractor and end client
The Practical Application You will first need to identify whether or not IR35 applies to a contract. To do this, you will need to assess both your written contract and working practices, which will ultimately hold more weight, using the IR35 tests. Contract Review Services Qdos Contractor provide a range of review services which will provide you with a professional opinion to the status of your contract. IR35 Contract Assessment Written contract only Full IR35 Contract Review Detailed report with assessment of both written contract and working practices Public Sector IR35 Solution Written contract and working practices, plus certificate specific for public sector assurance requirements BUY NOW BUY NOW BUY NOW Inside IR35 Should the rules find you inside IR35, you will need to pay a deemed salary at the end of the tax year on any relevant income, which will mean a reduced take home pay from such a contract. If you are found outside IR35, you will simply need to maintain a record of evidence, such as your professional contract review, in the event that HMRC request such evidence.
HMRC conduct enquiries into contractors IR35 status. Should they choose to do so, they will send you a letter requesting copies of contracts relating to a specified accounting period, details of the relevant end clients or agencies, a description of the services provided, and your opinion on whether or not the IR35 legislation applies, with any evidence you might have. If satisfied with the response, the enquiry will be closed. Otherwise, HMRC will require further information, request meetings with your end client, and ultimately come to a decision as to whether or not IR35 should have been applied. If it is determined that IR35 applies, HMRC will raise an assessment for the tax, National Insurance contributions, interest and any penalties found owing, which could go into the thousands. IR35 Insurance Having defended contractors for over 15 years, Qdos Contractor have the necessary experience to give you the best possible chance of success in an IR35 investigation. Tax Enquiry Insurance Qdos representation in the event of an enquiry, cover from day one all the way to tax tribunal BUY NOW Tax Liability Cover Cover for liabilities, interest, and penalties found owing in the event of being caught by the legislation, with all the benefits of our Tax Enquiry Insurance as well BUY NOW
Example IR35 Letter
Additional Rules Office Holders Contractors who take on management roles in their client s business must apply IR35 for tax purposes. HMRC defines an office holder as someone who holds a permanent, substantive position which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders. Public Sector In addition to the normal IR35 rules, contractors engaged in the public sector are also subject to additional procedures. If a contract lasts six months or more and you are earning 220 per day or higher, you will be required to provide your end client with assurance that you are applying IR35 correctly within 20 days of the issue or renewal of your contract. If the client is dissatisfied with the information, they can pass this onto HMRC for further investigation. The government have recently proposed further changes to contractors engaged in the public sector. It has been suggested that from April 2017, responsibility for applying IR35 will be placed on the public sector body or agency where applicable, as opposed to the contractor themselves. The government is currently undertaking consultation over the proposed changes, until 18th August 2016 which can be accessed here.
About Qdos What we do Qdos began in 1988 as a tax consultancy business and has grown significantly over the past two decades. Today the company has a number of branches forming the Qdos Group, each concentrating on a specific field, providing expert business services, products and advice. Qdos Contractor specialises in insurance and advice for UK-based freelancers and contractors, and boasts extensive insight, expertise and knowledge of any contractor issues regarding tax and the IR35 legislation. We also work closely with Qdos Accounting to provide a complete solution for our clients. Why we do it UK contractors who operate via limited companies are faced with many risks in their day-to-day operations. Because of this, Qdos have been working very closely with contractors for well over 15 years gaining eminence in the industry, particularly since the introduction of the prominent IR35 legislation in April 2000. Over the years, Qdos has grown in both size and reputation as a trusted contractor insurance broker as well as an expert tax advisor. Our aim is to provide UK contractors with everything they need for a happy contracting lifestyle, all under one roof, by providing assistance and service with IR35 issues as well as sustaining excellent quality and competitive premiums in the contractor insurance market. Why we re great at it Our online shop is uniquely accessible and effortless when it comes to purchasing contractor insurance, providing accurate quotations* on every page. Our online application process takes only a matter of minutes with all documentation issued instantly. Unlike many other brokers, we don t hide our premiums until you ve provided your details, as we are confident that our premiums, service and product are the best in the market. Since its origins, Qdos Contractor has handled well over 1,500 IR35 enquiries on behalf of UK contractors, with our ex- HMRC inspectors saving them over 35m in tax. All of our staff, from our tax advisors to our customer service teams, keep fully up to date with IR35 developments and are well versed in the subject. *with the exception of contractors in the energy sector whose services would be classed as manual. Please contact a member of the sales team or enter your details to obtain an accurate quotation online. For more information contact Qdos on: T: 0116 269 0999 W: www.qdoscontractor.com E: freelancer@qdoscontractor.com