What is the background?
Commonly referred to as IR35, Intermediaries legislation was introduced on 06 April 2000. It was first proposed by the Chancellor in the 1999 Budget - details were then given in a Budget press release numbered IR35.
The aim of the legislation is to eliminate the avoidance of tax and national insurance contributions (NICs) through the use of intermediaries, such as personal service companies or partnerships, in circumstances where an individual worker would otherwise:
- For tax purposes, be regarded as an employee of the client; and
- For NICs purposes, be regarded as employed in employed earner’s employment by the client.
Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary.
The worker could take the money out of the intermediary, normally a personal service company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.
The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary, the worker pays tax and NICs on a basis which is fair in relation to what an employee of the client would pay.
Who is affected?
Contractors who own and operate limited companies or have partnership arrangements.
Initially, it was the responsibility of the contractor to determine their own tax status by considering whether their contract terms/conditions and their working practices fell inside or outside of IR35 rules on each assignment they agreed to undertaken. This has now changed to the following:
From 06 April 2017
Public sector authorities became responsible for determining the IR35 status of all roles undertaken by contractors within their organisations.
From 06 April 2021
Medium and large-sized private sector companies became responsible for determining the IR35 status of all roles undertaken by contractors within their organisations.
Private and public sector organisations must take reasonable care when assessing IR35 status and cannot operate ‘blanket bans’. They must also provide contractors with a Status Determination Summary document to explain the reasons behind their IR35 decision.
Contractors have a right to appeal IR35 determinations – organisations are required to have a process in place to deal with these disputes.
If a contractor provides services to a small** private sector business, the contractor will remain responsible for determining whether IR35 rules apply to the assignment.
IMPORTANT - IR35 rules apply on a contract by contract basis. A contractor may legitimately have some assignments falling outside the rules and some which do not.
**According to the Companies Act 2006, a small company is defined as a business which meets 2 or more of the following conditions: it does not have a turnover of more than £10.2million, does not have a balance sheet total of more than £5.1 million and does not have more than 50 employees.
How can clients & contractors demonstrate compliance?
The main elements of IR35 compliance relate to the terms and conditions of the Contract for Services and the actual working practices of the assignment undertaken. Taking each of these in turn, the:
Contract for Services
- Must accurately reflect the terms and conditions of the engagement
- Must confirm an unfettered right of substitution and the ability to delegate work to others
- Must confirm that there is both financial risk and the opportunity to profit from sound management
- Must confirm that no mutuality of obligation or exclusivity exists between the contractor and client
- Must confirm that the client does not control/direct/supervise the work carried out by the contractor
Working Practices
The client must be able to demonstrate that the contractor provides their services in line with the contract for services and must ensure that the contractor is treated significantly different to and performs differently to the clients own staff. Positive indicators of this are:
- The contractor is not subject to the clients staff appraisal and review processes
- The contractor is not subject to the clients grievance and disciplinary procedures
- The contractor is identifiably different (e.g. ID passes) to conventional staff
- The contractor supplies all of his/her own equipment and materials
- The contractor provides directly for all of his/her own training requirements
- The contractor does not take advantage of facilities provided by the client to conventional staff (e.g. subsidised canteen, social events)
- The contractor does not receive statutory entitlements from end clients (e.g. holiday pay, sick pay, maternity/paternity pay)
- The contractor does not receive benefits typically awarded by the client to conventional staff (e.g. bonus payments, share options, pension)
The above lists are not exhaustive and are only provided for guidance. All contract terms/conditions and working practices will be uniquely different and must be reviewed on a case by case basis.
What if a contractor is deemed to be inside the legislation?
If a contractor is assessed to be inside IR35 rules, they will receive their income in the form of a ‘deemed payment’ where income tax and national insurance will be deducted as it would for a conventional PAYE employee.
What if a contractor is deemed to be outside the legislation?
If a contractor is assessed to be outside of IR35 legislation they can benefit from a range of entitlements. These include:
- The ability to set bespoke salary levels
- The ability to declare interim dividends
- Tax relief on capital / revenue business expenditure
- Contributions to company pension schemes
- Flat Rate VAT entitlements
How can I be sure of my status?
Contractors should take independent advice from employment law experts.
This advice should be pro-actively sought at the start of every contract assignment and, if they are long running engagements, at regular subsequent intervals.
How do Champion provide IR35 support?
In conjunction with our employment law partners Thorntons LLP, Champion have also developed an online IR35 assessment portal that helps end client organisations to accurately determine the status of contract roles.
Please click HERE for more information.
Summary
IR35 legislation is complicated and must be thoroughly considered before any important decisions are made.
These notes are designed to provide summary information only and further advice can be sought by speaking to a qualified Champion advisor.
Contact Us
For more information and advice simply request a call back or contact one of our advisors on 0161 703 2549. Alternatively please email us on info@championcontractors.co.uk.