As accountants specialising in tax, when it comes to Contractor Tax, one of the most common questions we hear is ‘what are the IR35 rules and how does a Contractor Accountant ensure they are IR35 compliant?’
Earnings and IR35
IR35 is a piece of legislation that was put in place back in the year 2000, with the aim of preventing so-called disguised employment. Disguised employment is when someone who would usually be employed by a company performs their duties through a personal service company exclusively so they can enjoy the tax benefits of this. Not only is the former employee able to take advantage of clever remuneration planning opportunities to reduce both their personal tax bill and Class 1 National Insurance Contribution payments, but the employer has one less person on their payroll and thus saves the associated 13.8% Employer’s National Insurance Contributions.
How Could IR35 Affect You?
If you are caught under the IR35 compliance legislation, then you will be unable to use traditional tax-planning techniques and the majority of your invoices will effectively have to be paid as salary so you end up being taxed in the same way as an employee.
The government determines your IR35 status by looking at whether your engagement would be one of employment or self-employment, so it’s important to have a good contractor solicitor review your contract specifically with this in mind.
How Do The Government Determine Employment Status?
At the moment there is no legal definition of employment and self-employment so the Government tend to refer to case law in order to establish the components of these. The most quoted case is that of Ready Mixed Concrete in 1968, where it was judged that employment existed after careful consideration of the detail of the contracts relating to Personal Service, Obligation and Control.
As a general rule therefore if all of those factors are in place, then it is more likely that your contract will be considered as employment. If they are not in place you are less likely to be caught inside IR35 legislation, however, please be aware that the government also look at the working practices of the person engaged and not just the contract you are working under.
Personal Service (also referred to as ‘right of substitution)
One essential element in a contract of employment is the need for a particular person to carry out a particular role. A contractor, on the other hand, has the freedom to choose whether they perform the duties themselves or hire someone else to perform them.
Mutuality of Obligation
In normal employment relationships, there is an expectation of continuous work being provided to a person with the expectation that all work is completed. If there is a clause in the contract, however, that states that there is an obligation for the client to provide further work and for the contractor to accept this work, then this is classed as a ‘Mutuality of Obligation’ and so would be caught under the IR35 legislation. Rolling contracts and contracts that are continually renewed would also fall under this legislation.
Right of Control
This concerns what tasks have to be done, when and where they have to be done, and how they have to be done. In an employment situation, all of the above is dictated by the employer. Therefore, if the person completing the tasks has some degree of autonomy over these things, it would indicate a degree of self-employment. Just to complicate matters though, if the client can move the contractor onto a different task according to their priorities or exercise significant control over how they perform their duties then the contractor would point to being employed rather than self-employed.
This is just a brief overview of some of the complexities of IR35, and if you would like any help in understanding it further and seeing whether it applies to you then just give us a call on 0161 456 9666 or send an email to firstname.lastname@example.org
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