In the 1999 Budget, the Chancellor proposed new IR35 laws which would stop the avoidance of Income Tax and National Insurance Contributions by those who used intermediaries. The Budget press release which gave details of the plans was numbered IR35 and that label has been synonymous with the legislation ever since.

The changes took effect from April 6^th in 2000. Prior to the introduction of IR35, a worker could set up a company and take payment for the work carried out through it. The individual could then take payment through the business, minimising any tax and National Insurance paid.

IR35 status

IR35 was introduced to stop permanent employees being treated as contractors when performing duties for a business. This would allow them to benefit from the tax-related perks of being contractors without having to accept further responsibilities. The example used during the Chancellor’s press release involved an employee leaving their job on one day and returning a few days later as a contractor, completing the same tasks through their own company.

As a self-employed contractor, wages could be taken as dividends and less tax would be paid. HMRC can look at the contract and decide whether the contractor is a ‘disguised’ employee. If the worker is considered to be in breach of the rules of IR35, they will be taxed in the same way as an employee, through PAYE.

Deciding who falls within IR35

To determine who falls within IR35, a hypothetical agreement is drawn up between the contractor and their client. The tests used to decide employment status are applied to the hypothetical contract and if it is found that the contractor is providing a service to the client, they would be deemed to be within IR35.

Which occupations are affected by IR35?

All sectors are affected by the IR35 legislation; this includes those working in the medical profession, clerical workers, engineering consultants and construction industry workers. The intermediary has to be defined as a Managed Service Company and should be able to give an affirmative response to two questions: if working directly for the client, would the contractor be classed as employed and does the company that the contractor is working through meet the criteria for a Managed Service Company?

What happens if the IR35 legislation is ignored?

HMRC may challenge anyone who is suspected of avoiding the correct payment of duties. If a person is found to be non-compliant, HMRC is able to collect the additional income tax and National Insurance which is due and charge penalties and interest on outstanding amounts.

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About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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