Intermediaries Legislation from 17/18 - IR35

Intermediaries legislation, commonly known as IR35, is a complex and misunderstood area of tax law.

It has been on the books for a long time and HMRC have often threatened to tighten it up. It looks to do so from 6th April 2017.

Historically the intermediary, that is to say usually the limited company / professional service company the worker charges the end client through, has been responsible for deciding if the contract is within IR35 or outside IR35 i.e. whether IR35 applies to the contract. From 17/18 where the end client is a public sector organisation, the responsibility of making this decision passes to the end client.

IR35 is designed to stop disguised employment, the "Friday to Monday" type employment recategorisation where a permanent employee reappears as a contractor/consultant and is taxed more favourably for doing so (taking income via a limited company, minimal salary and dividends). HMRC decides if the worker would otherwise be categorised as an employee if the contract did not exist. There are many tests to decide if the contract is an employer-employee relationship or not but the main points you need to fulfil if you are to prove you are a genuine contractor are: Control, Substitutability & Mutuality of Obligation. That is to say you have control over your work and how your perform your duties; you can send someone other than yourself to satisfy the obligations of your contract if the need arises; and that there is no obligation of your client to extend your contract beyond the agreed contract term or for the contractor to work past the contract end date. This last point also touches on the 24-month rule where a place of work is considered permanent after 24 months of continuous attendance. If you satisfy ALL of these three criteria you may reasonably argue that a contractor-client relationship exists.

If you cannot and you are caught inside IR35 this has serious financial implications. You will have to pay PAYE and NI through your limited company viadeemed salary. That is both employer and employee NI! This is why many contractors work through umbrella companies which deduct PAYE/NI at source. Weighing up whether it makes financial sense to stay limited if caught by IR35 is an easy calculation to make and you should ask your accountant to do this analysis for you. In a nutshell though you are allowed to deduct a 5% general expenses allowance but have to pay PAYE & employees NI and employers NI so financially it is a big hit and as a contractor you need to know your increased tax liabilities and the impact of this when making this decision.

Next week we will explain another often misunderstood area of limited company tax law: Director's Loans Accounts.