About IR35, and the logic
The tax rule known as IR35 takes its name from the Inland Revenue press release issued in 1999 labelled ‘IR35’. It is designed to stop individuals who operate through companies (PSCs), referred to in the legislation as ‘intermediaries’, from paying themselves by way of dividend or profit share, so avoiding payments of employed levels of PAYE and NICs. IR35 is also known as ‘the Intermediaries Legislation’ and ‘the Off Payroll Rules’.
Application of the rules depends on an employment status test because, from a ‘tax avoidance perspective’, if a PSC is used only for tax benefit purposes then the tax benefit (e.g. payment by way of dividend in respect of which lower tax rates apply) should not be allowed. Logic therefore dictates that if the worker would be an employee of the hirer were if not for the existence of the PSC, the worker should be taxed as an employee.
However the requirement for an assessment is problematic as the tests for establishing an employment status are not hard and fast, and open to interpretation. Each case has to be judged on its individual facts and circumstances so leading to uncertainty in many situations. Also the logic is challenging as a contractor may have a genuine business, normally subject to company tax rules, yet still be subject to employed levels of tax. Logic aside, more than 2 decades after its introduction, the IR35 rules have now changed to make all hirers, other than small businesses, responsible for assessment and liable if tax is due; the lack of certainty under the tests introduces tax risk into the engagement with contractors. Recruitment businesses that supply the contractors are consequently affected as they have to ensure that correct levels of payment are made.
Liability for unpaid levels of PAYE and NICs exists for up to 6 years and can be extended by HMRC in certain circumstances.
IR35 contracts are often referred to as ‘IR35 friendly’ or ‘Outside IR35’, as are assessments of work arrangements. Particularly since the imposition of the public authority rules, jobs have been described as ‘outside IR35’ where public authorities have wanted to hire a suitable contractor. The words have no effect in law and care should be taken to ensure that the work is suitable such that a contractor can be paid without application of the tax rules.
HMRC provides an online assessment tool (CEST) and says it will stand by the results provided that all answers to the questions raised are correct. Some other providers also provide online assessment tools. All of these can help to some degree but in some cases are subject to the limitation that they cannot review the contracts, nor can they review actual working practices on an ongoing basis, although there is nothing to stop a hirer from checking actual working practices and re running an assessment from time to time.
Some IR35 tax and expenses insurance is available in the market. Care should be taken to review the policy terms and conditions before proceeding, noting that all policies have ‘get out’ clauses. Incorrect information provided in an initial assessment may result in refusal of cover.
Wherever it is thought that a piece of work can be undertaken by a contractor without liability for employed levels of tax arising, it is critical that the right contracts are used.
Our expert IR35 team help our clients with IR35 assessments, contract reviews (where a third party contract is proposed), project description and statement of works drafting, work schedules, consultancy agreements and contractor contracts (both for single and multiple projects). Our expert team comprises qualified Solicitors (non practising) and employment status experts. Contact us now to discuss your requirements.