IR35 Legislation – Off-Payroll Working through an Intermediary
IR35 is the short name used for the ‘intermediaries legislation’, which is a set of tax rules that apply to individuals that work for a client through an intermediary. The IR35 legislation specifically challenges those people who supply their services to clients via their own company, often known as a ‘personal service company’ who in the eyes of HMRC, should be classed as ‘disguised employees’. HMRC would therefore not recognise the contractor in question as ‘self-employed’ from a taxation perspective and hence they should be taxed in the same way as a normal employee subject to the requirements of PAYE and NI.
The main criteria for IR35 are as follows;
- Control; Does the employer have control over the individual i.e. does the employer decide what you do, where to provide your services, when to work and how to do your work?
- Substitution; If the individual cannot substitute someone else to do their work they may be regarded as an employee.
- Right of refusal; If the contractor can’t prove they have the right to refuse work, it suggests they are an employee.
- Provision of own equipment; A self-employed contractor generally provides their own equipment to do the job.
- Financial risk; An individual who risks his own money by, for example, buying assets needed for the job and bearing their running costs and paying for overheads and large quantities of materials, is almost certainly self-employed.
- Basis of payment; Employees tend to be paid a fixed wage or salary by the week or month and often qualify for additional payments such as overtime, long-service bonuses or profit share. Independent contractors, on the other hand, tend to be paid a fixed sum for a particular job. Frequency of payment will also be taken into account under this test.
- Right of dismissal; A right to terminate an engagement by giving notice of a specified length is a common feature of employment. It is less common in a contract for services, which usually ends only on completion of the task, or if the terms of the contract are breached.
- Employee benefits; Employees are often entitled to sick pay, holiday pay, pensions, expenses and so on. It is also helpful to look at working patterns in establish whether an individual is employed.
- Length of engagement; Long periods working for one engager may be typical of an employment but are not conclusive. It is still necessary to consider all the terms and conditions of each engagement. Regular working for the same engager may indicate that there is a single and continuing contract of employment.
- Intention; It is the reality of the relationship that matters. It is not enough to call a person "self-employed" if all the terms and conditions of the engagement point towards employment. However, if other factors are neutral the intentions of the parties will then be the deciding factor in employment status.
Please also find a helpful HMRC link which can electronically help to establish employment status; https://www.tax.service.gov.uk/check-employment-status-for-tax/setup
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.