5, also known as the Intermediaries Legislation, is a set of tax rules in the United Kingdom that affects individuals who work through their own limited companies or other types of intermediaries. The purpose of IR35 is to prevent tax avoidance by individuals who would otherwise be considered employees of a client company but who set up a limited company or other intermediary to pay themselves as contractors.
If you are a contractor working through your own limited company or intermediary, it is important to understand IR35 to ensure you are complying with the tax rules and avoid any penalties or back taxes. Here is a guide to what you need to know about IR35:
What is IR35?
IR35 is a set of tax rules introduced by HM Revenue & Customs (HMRC) in 2000 to address the issue of “disguised employment”. This is where an individual works for a client company on a self-employed basis, but their working arrangements are such that they would be considered an employee if they were working directly for the client company. IR35 aims to ensure that such individuals pay the same amount of tax and National Insurance contributions as if they were an employee.
Who does IR35 apply to?
IR35 applies to individuals who work through their own limited company or other intermediary and who would be considered an employee of their client company if they were working directly for them. This includes individuals who work for a client through a personal service company (PSC) or an agency.
How does IR35 work?
Under IR35, the responsibility for determining whether an individual is an employee or a contractor falls on the client company, not the individual or their intermediary. The client company must assess the individual’s working arrangements and determine whether they would be considered an employee if they were working directly for the company.
If the client company determines that the individual is a disguised employee, they must deduct income tax and National Insurance contributions from the payments made to the individual’s intermediary. If the client company fails to make this deduction, they may be liable for any tax and National Insurance contributions owed.
How do you determine whether you are caught by IR35?
If you are working through your own limited company or intermediary, you should assess your working arrangements to determine whether you would be considered an employee of your client company if you were working directly for them. The key factors that are taken into account when making this determination include:
Control: how much control does the client company have over the work you do and how you do it?
Substitution: are you required to carry out the work personally, or can you send a substitute to do the work instead?
Mutuality of obligation: is the client company obliged to offer you work and are you obliged to accept it?
Financial risk: do you bear any financial risk for the work you do, such as the cost of rectifying any errors?
Integration: how integrated are you into the client company’s operations?
If your working arrangements indicate that you are a disguised employee, you may be caught by IR35.
What are the penalties for non-compliance with IR35?
If you are caught by IR35 and fail to pay the correct amount of tax and National Insurance contributions, you may be subject to penalties and interest charges. The client company may also be liable for any tax and National Insurance contributions owed if they fail to deduct these from payments made to your intermediary.
What are the recent changes to IR35?
From April 2021, changes to IR35 were introduced for medium and large private sector clients. Under the new rules, the responsibility for determining whether an individual is caught by IR35 now falls on the client company, not the individual or their intermediary. This means that medium and large private sector clients must assess the employment status of individuals