How will I know if I am caught by IR35 and what will it cost me?

In brief: working via an intermediary

Legislation introduced in April 2000 affects anyone who is working via an intermediary, such as a company or partnership. IR35 will only apply if the individual is working for a client under circumstances that if it were not for the imposition of the Limited company or Partnership (known as the "intermediary") would be one of employment.

Anyone working via an intermediary will be caught by new rules if they fail the 'IR35 test'. If their terms and conditions or working practices are of employment then they will be caught by IR35 legislation.

IR35 Legislation: relevant engagements & deemed salary

The IR35 legislation is designed to increase both the Tax and National Insurance (NIC) to HM Revenue & Customs from the service industry, which on the whole has found it more tax efficient to distribute income as dividends, usually subject to the payment of a small salary. To this end, it introduces the concept of "deemed salary" which will be taxed and subject to NIC as if it has been paid as a salary.

The Government's concern is that small limited companies are being used to disguise employment, so this is the test which has been applied: -

Where the employee is provided by his/her Company to an ultimate client on terms which would normally constitute an employment with that client, this is called a relevant engagement and the IR35 rules apply.

How will I know if I am caught by IR35?

The test is to determine from the outset whether or not the worker is effectively an employee. The overall picture will be made up by how the contractor operates on a day to day basis – the reality of which must be reflected by the contract. The Revenue will often challenge any contracts and try to discredit them. Some common arguments are:

  • The contract is not a "live" or "working contract";
  • The contract has been "bought off the shelf" or has been copied from another contract and does not therefore reflect actual terms;
  • As the Revenue were not part of the process in preparing the contract, they do not accept it; and
  • The contract has not been submitted to the Revenue to confirm the contract is one of self-employment.

The Revenue's opinion may be that the contract is not a true reflection of the work carried out. Remaining outside of IR35 is determined by the working practices of the individual. Many people try a "tick" approach. For example if 8 pointers are towards self-employment and only 6 towards employment, then the individual must be self-employed. This is a popular and incorrect basis. In one judgement the judge specifically stated that using a points system would not be acceptable in determining status.

Are you IR35 compliant? Factors to Consider

The IR will consider the whole picture but some factors can be:

  • What is the client's business?
  • Is there any form of contract?
  • Is the contractor at financial risk in the project?
  • Is the contractor working exclusively only for one client?
  • Does the contractor work with their own materials on site?
  • Does the contractor have to rectify work at their own expense?
  • Can he or she provide substitutes to carry out the work in place of themselves?
  • Is the contractor "part and parcel" of the client's organisation?
  • Is the contract project based with deliverables and milestones?
  • The intention of the parties
  • The length of the contract
  • Terms of contract – e.g. does the contractor have a notice period, the hours of work, where and how is the work carried out?
  • The pay structure e.g. holiday pay, is the worker paid by the job/project or a fixed wage at a fixed time (as an employee would be);
  • Are any benefits provided similar to employees (company car/van, sick pay bonuses etc.) and
  • Has any Government Department (incl. the Revenue/Contributions Agency) ever provided a written status ruling in the past?

Each case is individual, so all factors must be considered to arrive at the correct status decision. It is worth noting that the Revenue questionnaire to determine status is over 80 questions in length as they will consider as many factors as possible. Do not leave the decision to the Revenue or it could be a costly exercise once additional Tax, NIC, interest and penalties are added.

The Revenue's view on the 'painting a picture' is this:

"In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person's work activity. This is not a mechanical exercise of running through items on a checklist to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case."

So how much will it cost me if I fail the IR35 test?

That really depends on how much your contract rate is.

Generally-speaking the cost to you will be the additional National Insurance contributions that are payable on the deemed salary. To calculate exactly how this would affect you, we have an IR35 calculator on CUK.

Where can I seek a professional opinion on whether I pass or fail IR35?

The easiest way to find out is to ask one of the expert providers advertised on CUK for an opinion on your contract. The Revenue do offer a form of IR35 contract opinion service, but almost all experts advise against using this service, at least without their professional guidance first.

The rest of the IR35 section looks at some of the above factors in more detail to help you understand if you are IR35 compliant or not.

Article kindly supplied by former Inland Revenue tax inspector Ray McMahon