IR35 is legislation brought in by the Government in April 2000, to counter what HMRC class as a disguised employment.
The aim of HMRC's IR35 legislation is to stop people leaving full time employment and then returning to the same job straight away as a contractor working through their own Limited company, in order to reduce their tax and National Insurance libilities each year.
An example of HMRC's view of disguised employment would be if a permanent employee were to leave their place of employment on a Friday and then return to work on the Monday, at the same company, doing the same job they ahd finished on the Friday, but as a contractor rather than a permanent employee.
IR35 Inside or Out?
If your contract has the same level of risk, responsibility, liability and control as a regular employee,then you would be classed as inside of the IR35 legislation. This means you will have to pay full tax and full National Insurance (instead of the usual salary and dividends from the profits of your company) and reduced expenses i.e. you'll earn less money. This is because HMRC believes that as you aren't taking the financial risks or have the same level of control as a director of your own limited company, you aren't entitled to the same corporate tax structure.
If your contract and working practices look like you are inside IR35 it can still be worthwhile operating via your own Limited Company as you can still claim certain expenses.
Contract and working practices tips
The IR35 legislation is complex, and the only way of being sure you are operating outside of IR35 is to have your contract and working praactices reviewed by a professional. Here are just a few tips and points that cover what HMRC are looking for to see whether you are inside of the IR35 legislation:-
- Freedom and control - Are you able to work independently, and not under the control of your client?
- Financial Risk and your own equipment - If you are an employee, you rarely risk financial loss by being employed, and you usually have a computer and other equipment provided to you. If you are a director of your own company and you buy assets such as PC's, laptops, servers, printers, office equipment to service a client, then you are at financial risk - and also pointing towards being outside of IR35.
- Dismissal rights - Do you have a fixed notice period? If so HMRC will argue that this is like an employee, therefore there should be a provision in your contract for immediate termination should the client choose to do so.