IR35 – Part of HMRC’s fight against tax avoidance
The intermediaries legislation, or IR35 as it is better known, is tax avoidance legislation targeting ‘deemed employees’. These are workers supplying their services to clients via an intermediary, such as a limited company, who would be classed as employees under employment law if not for the intermediary, and so should be taxed like employees.
HMRC enforces the rules to determine whether a limited company contractor is a deemed employee for tax purposes. The legislation is notoriously complex. Falling foul of the Act can lead to substantial costs in back taxes, fines and penalties and liability can now be traced to not only the contractor’s limited company, but also the agency or hirer.
On top of this, falling within IR35 tax status means a contractor could suffer a 20% decrease in net take-home pay. It’s no surprise most contractors are reluctant to take on contracts that are caught by IR35.
Who is affected by IR35?
Until recently, only contractors have been responsible for establishing their IR35 status. However, reforms in the public sector mean that from April 2017:
- Hirers – public sector clients - determine the IR35 status of contractors
- Agencies are responsible for calculating and deducting tax from contractors’ pay
- Agencies risk liability for unpaid tax and penalties if an IR35 evaluation is incorrect
- Accountants risk losing their contractor clients, as contractors are forced into payroll solutions
With private sector changes expected to soon follow, every organisation that engages contractors could soon be affected by IR35.
‘IR35 (intermediaries legislation): find out if it applies’
- HMRC’s introductory guide to IR35
- Explains how IR35 might apply in certain scenarios
- Beware, HMRC’s opinion won’t always align with employment law
You can view this guidance on the gov.uk website.
Employment Status Manual [ESM3000]
- Used by HMRC’s compliance officers
- Constantly updated in line with latest court and tax tribunal judgements
You can view this manual on the gov.uk website.
HMRC’s contract review service and IR35 helpline
- Contractors advised to steer well clear
- IR35 Shield delivers an unbiased verdict without putting you at risk of investigation
The intermediaries legislation has been consolidated in both:
- Income Tax (Earnings and Pensions) Act 2003 (Part 2, Chapter 8)
- Statutory Instrument Social Security Contributions (Intermediaries) Regulations 2000
In March 2017, legislation was published confirming the changes to the enforcement of IR35 in the public sector:
- Finance (No. 2) Bill 2017 (Part 1, Chapter 2)
The history of IR35
1968 - The element of ‘control’ first appears
- Ready Mixed Concrete Ltd v Minister of Pensions and National Insurance (1968)
A contract of service exists if the contractor: “agrees that in the performance of service he will be subject to the other’s control”.
2000 - IR35 becomes law
- Intermediaries legislation adopted in 2000 Finance Act
- Introduced to address perceivably large number of workers incorporating to reduce their tax liability
2011 - OTS review of IR35
- The Office of Tax Simplification (OTS) publishes damning review of IR35
- Review calls for IR35 to either be suspended or better enforced by HMRC
2012 - Business Entity Tests (BETs)
- HMRC introduces framework to better administer IR35 in form of BETs
- BETs scrapped in April 2015 after clients mistake it for an IR35 status test, rather than a filter mechanism to assess risk
2016/2017 - Public Sector IR35 Reforms
- Consultation released in May 2016 proposing plans to shift the IR35 compliance burden and tax liability in the public sector onto agencies and hirers
- Plans to legislate the changes are confirmed in the 2016 Autumn Statement, with draft legislation released in December 2016
- The new rules adopted in the 2017 Finance Act
IR35 Status Factors
These are the main factors affecting employment status, as per the case law, and their relative weights shown by size. This is a very high level perspective, and there are many nuances with testing status, which is why we ask over a hundred questions when assessing your status.