“IR35” might sound like an innocuous term, but the tax law it describes is anything but. All limited companies and partnerships that provide services to their clients ought to be aware of the basics of what IR35 entails, as the tax consequences of ignoring this legislation could be very costly.
IR35 is designed to prevent tax avoidance in situations where limited companies are providing services to a client with employee-employer like working arrangements. As with other tax legislation, no distinction is made between companies who are actively seeking to avoid tax and those who accidentally fall foul of the regulations.
What is IR35? How does it work?
The most typical scenario in which IR35 arises is the following:-
A business might need to engage a worker. The business owners might not want the expense and hassle of taking on an employee – particularly if a worker is only required on a temporary basis – so instead they might seek a self-employed contractor.
Self-employed workers do not have as many rights as employees (such as holiday pay and notice periods) and the business that engages them doesn’t have to pay Employer’s National Insurance. The business hiring the workers are well aware, however, that engaging a self-employed person and treating them like an employee is against Revenue rules.
The Revenue lays down principles to follow to establish whether workers are self-employed or employed. In order to gauge the status of their workers, businesses must consider matters such as how much control they have over the workers, who provides the tools for the worker to do their job, if the worker has the right to send a substitute in their place and if the worker has to correct any mistakes at their own expense and in their own time. (There are many other factors to consider).
If the rules deem that the worker is in an employee like a relationship with the hiring business, the worker must be taken on as an employee and paid accordingly, with the hiring business bearing all the responsibilities being an employer entails.
To avoid becoming an employer, a business might insist that its workers operate through a limited company. Since limited companies cannot be employees, the engaging business is safe from being accused of tax avoidance. The worker it is seeking to hire will typically be only too happy to work via a limited company to get the contract. The Revenue does not like this situation as they lose out on tax Revenue.
Enter IR35 legislation, which places the responsibility on the worker’s limited company (or less frequently, partnership) to tax its profits as if it’s an employee. IR35 is known as intermediaries legislation because it is the creation of the intermediary (the limited company or partnership) between the worker and the client that stops the client having to hire the worker as an employee. It is also referred to as “disguised employment” legislation for the same reason.
In next week’s blog, we’ll take a closer look at the precise situations when IR35 legislation applies and how it is calculated. In the meantime, if you think IR35 might apply to your business, please feel free to get it touch – Southside Accountants in Wimbledon and London. We will be happy to assist you. The above is intended to be general advice only as individual circumstances vary.