HM Revenue and Customs (HMRC) introduced the ‘intermediaries legislation’, which became known as IR35, in the 2000 budget. The legislation was introduced to combat ‘disguised employees’. This refers to an individual who would be treated as an employee were it not for the fact that they provide services via their own personal service company, and paying less tax in the process.
Contractors working via limited companies are not liable to pay NICs on income taken as dividends, resulting technically in a revenue loss to the Treasury. As a result of this, IR35 exists to enforce proper working practices.
Being ‘caught’ by IR35 can have serious financial consequences. If the Inland Revenue investigates a contract and decides that it is ‘caught’ by IR35, they will calculate a deemed payment treating all income received as salary and demanding all tax and National Insurance contributions on amounts initially paid out as dividends.
HMRC can go back up to six years, so even if after a contract ended, there is still a risk that it could be subject to an enquiry.
The interpretation of IR35 is reliant on historical case law and, as a result, some factors surrounding IR35 change over time and specific issues become more prominent following each significant case.
To determine whether an individual is caught by IR35, HMRC will look at both the written contract between the limited company and the agency/end-client, along with the actual working practices, i.e. the way the work is performed in reality.
In the event of an IR35 enquiry, the working practices will always tend to carry more weight than the written terms themselves. If a compliant contract is in place, the actual working arrangements must mirror the written terms. HMRC will seek clarification of a contractor’s working practices directly from their end-client. Therefore this process must be carefully managed.
As a compliant accountancy practice, we have a duty of care to our clients when it comes to IR35, and keeping them updated with all legislation is a part of that commitment. That is why we have teamed up with IR35 specialists who have the knowledge, and expertise to conduct a full contract review granting you complete peace of mind. Along with this, they will provide guides, advice and free online templates on IR35 to ensure you are never left in the dark.