Introduction To IR35

The Legislation commonly known as IR35 was first referred to in Gordon Brown's Budget Speech of 1999, in which he referred to "tax avoidance" by those operating through personal service companies. The regulations initially proposed by the Inland Revenue were contained in Inland Revenue press release "IR35". The name of that infamous press release has stuck with us and the new Government Legislation is now commonly known by everyone as "IR35".

Reason For Introduction

The Government's aim in introducing IR35 is to place certain consultants (originally referred to as "Friday to Monday workers") in exactly the same position as employees. They would therefore be prevented from benefitting from operating a limited company by dividends (which do not attract National Insurance Contributions), claiming expenses which would not be allowed to direct employees and splitting their income through share capital schemes with spouses etc to avoid higher rate tax liabilities.

Effect Of IR35

There are now two kinds of contractors - those who are caught by IR35 and those who are not. If you are what the Inland Revenue/Government consider to be a genuine contractor, you can continue to pay yourself a small salary and take the rest of your income in the form of dividends, as was the case up 5 April 2000 and is still the case for any other type of business that earns its profits by means other than personal services under contract. If you are caught by the IR35 Legislation, then you can no longer take your profits as dividends, split your income or claim all of your company expenses. A "deemed salary" has to be calculated, which will have the effect of reducing your take home pay by 10-20%, depending on the rate you are on.

IR35 Criteria

To determine whether or not you are caught by IR35, the Inland Revenue will apply various questions to your contract and will look at the overall picture in determining your status. The matters they will consider are:

Do you have the right of control, i.e. do you work in your own style, in your own time at your own pace (as a self-employed person would do) or do you work under the direct control of a project leader or other company employee?
Supply of Equipment and Materials - do you supply your own equipment, e.g. laptop computer, consumables and other materials to complete the project?
Business Management - do you have the ability to profit from sound business management? Are you responsible for rectifying mistakes in your own time and at your own expense as a self-employed person would be responsible, or do you simply work for hourly rates without further responsibility or risk?
Do you have your own business premises in which you genuinely carry out some of the project work?
Do you have liability and indemnity insurance and other relevant business insurances?
Do you spend money on training?
Do you have the right to substitute or use assistants in completing the project?
Is your contract project based with deliverables or simply for hourly rates?
Do you advertise your services (not just submitting CV's to agencies)?

The answers to the above and other questions will determine your status.

D J Colom & Co offer a status review service for both clients and non-clients of our firm. If you are interested in this service, please click here.

You can also calculate your approximate net pay using our IR35 calculator - click here.