IR35 was introduced as new legislation as part of the Finance Act 1999, as a way of plugging the £900million loophole in the tax law of the time.
Up until this legislation, contractors operated through either an umbrella or limited company. In doing so they were free to manage their income themselves, normally with the assistance of an accountant. You will know, if you have been contracting for a while that historically this included low salary levels being drawn together with expenses, with a balance usually paid as a dividend. Dividends were taken rather than salary as they do not attract National Insurance deductions and they also allowed income to be passed to other individuals (normally people on low income such as working/non-working spouses).
IR35 is aimed at the individual and not the Limited company/Umbrella company. It is policed through the existing self-assessment regime. As well as the tax the Inland Revenue determines has been avoided, penalties will also be applied which can be up to 100% of the tax avoided.
IR35 Employment status (test)
Outlined below is a guide to the general test that the Inland Revenue perform to help decide status under IR35. You should consider each of the criteria separately and then at the end try to conclude what the cumulative effect is in assessing whether or not the contract is either akin to employed or self-employed status
You should consider each point individually, however, no particular point should be looked at in isolation when forming your opinion of any contract, as the Inland Revenue are not know
known to rule on an individual area, only on the overall position.
Control:- Does the end client dictate duties and work to be performed each day? If yes this is a strong indication of being “employed”. If your contract states that you control and dictate what you do on a daily basis, and how the work is to be completed, this is a strong indication of being “self-employed”.
Pay:- If your contract clearly states that you will be paid on an hourly, daily, weekly or monthly basis, this is a strong indication of being “employed”. If you have an agreement to be paid in stages based on completion/part-completion of the project or task, this would look more like being “self-employed”
Financial Risk and Business Management:- If your business offers you the opportunity to make a profit in good times and the potential to suffer financially in bad times, this can be a strong indicator of self-employment. Having a fixed cost element to your contract, meaning you will suffer loss if you are unable to complete the services in agreed timescales, will strongly lean towards self-employment. If you are paid regardless of how well you do, and merely for turning up to work each day, you are probably going to be perceived as employed in the eyes of the Inland Revenue.
If you use the client’s equipment and don’t have the option to purchase/supply your own for the provision of the services, this can be deemed to be an indicator of employment. By having the option to buy and use your own equipment on site (or elsewhere), you potentially suffer a loss of value on this, therefore creating financial risk.
Substitution:- If you have the right to substitute in your contract, this is a strong indicator of self-employment. This is regardless of whether you have actually substituted or not. If you do not have the right to make a substitution and the name of the individual supplying the services is clearly stated in the contract, this can be seen as an indicator of employment.
Termination:- If you and the client can terminate your contract with a fixed notice period, this can be seen as suggesting employment. If termination is only due to breach, then this would suggest self-employment. In practise, this is usually difficult to negotiate away from as the majority of clients will require a notice period.
Duration:- If you work on one contract for a long time, this can be considered a career position and therefore a form of employment. If you are only working for the end client for a short time, then this may suggest self-employment.
Classification: - Are you classified as a skilled worker who provides services to different clients in a professional and business like fashion? If so, this would suggest that you have a status of self-employment
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