IR35 is a set of tests introduced in the Finance Act 1999 that determines whether you are doing work which should be taxed in the same way as a PAYE employee (Fail IR35), or whether you should get the benefits and flexibility of being taxed as a Contractor (Pass IR35).
Who does IR35 effect?
IR35 affects contractors who provide services through their own limited company.
Who makes the IR35 decision?
If the contract is in the Public Sector
From April 6th 2017, IR35 status for Public Sector Contracting will be determined by the client or Hirer and not the contractor.
If the client does decide that IR35 applies (Fail IR35) the contractor will be taxed exactly as if it were an employee.
If the contract of services is in the Private sector
The status decision to Pass or Fail IR35 if providing services to the private sector, is that of the directors of the company (this will often be the same person as the worker). It is not entirely based on the contract wording, but also the relationship the worker has with the hirer.
How do I know if I am caught by IR35?
The test is to determine whether or not the worker is effectively an employee. This will be made up by how the contractor works on a day to day basis – the reality of which should then be reflected by the contract.
There are core and secondary tests which provide indicators on whether a worker would Pass or Fail. The core tests include:
- Mutuality of obligation
- Direction & Control
- Business Risk
Contractors are asked to consider the core and secondary tests, apply them to the role they will complete, and then assess their status.
What if I am unsure?
Not everyone is able to make an IR35 decision before they set up a Limited Company. This may be because they have not yet secured a role, or are not entirely sure on what the duties will involve until they start work. If this is the case, you can make the decision once the contract has started.
How will my decision impact my Limited Company?
The decision as to whether you Pass or Fail will affect two areas
Those who Pass IR35 would see any company profits distributed as dividends payments to the Shareholder/s. Profits for those who pass IR35 typically incur corporation tax at 20% and then any dividend tax if applicable. Dividends do not incur any National Insurance Contributions and are, therefore, seen as an advantageous way to take home income.
Those who Fail IR35 would see any income in the company distributed as bonus payments. Bonus payments are treated in the same way as salary and incur income tax and National Insurance deductions.
Travel & Subsistence expenses
Those who Pass IR35 will be able to claim tax relief on the costs associated with travelling or driving to or from work, accommodation when staying away from home and subsistence costs (within the HMRC scale rates).
The legislation is written in that the workplace becomes a permanent one when the assignment Fails IR35. Therefore expense claims for travel, accommodation and subsistence will no longer be allowed for tax relief.
For more information or for a chat with one of our advisors please contact us