The original IR35 rules
The contractor tax known as IR35 (named after an Inland Revenue publication) has existed since April 2000 – see Sch.12 Finance Act 2000. Under this tax a PSC contractor, whose deployed individual provides personal services to the hirer, is responsible for assessing ’employment status’ under the engagement arrangements, and for paying tax due where there is ‘deemed employment’.
‘Deemed employment’ arises If there would be an employment relationship (between the hirer and the individual) were it not for the existence of the company and any agency involved. This does not mean there is actual employment, simply that there is a ‘deemed employment relationship’ for tax purposes.
A ‘deemed employment’ relationship is determined by considering the law around employment status – a notoriously challenging area that involves assessment of the intended arrangements and contracts as well as the working practices during the engagement.
The rule extends to contractors operating through partnerships. .
HMRC may reach a conclusion that is different from the contractor’s opinion even if supported by legal advice. Liability follows the outcome as to who is correct, ultimately determined by a Tax tribunal or higher court. HMRC provides an online tool – check employment status for tax (CEST) – to assist with assessment but in common with all other online tools, this cannot review the contracts nor monitor working practices.
Where there is a deemed employment relationship the PSC must account to HMRC for employment taxes on 95% of the income earned by the PSC from that relationship, there being a 5% top slice exemption to allow for administration expenses.