What is IR35?
IR35 is a tax and national insurance contributions legislation which may apply if you work for a client through an intermediary such as a limited company. If HMRC decide you are an employee of a client rather than a subcontractor they can collect the income tax and national insurance that would have applied if the payments had been made to you as an employee (eg. net of tax and national insurance). And they collect this from YOU.
Does IR35 apply to me?
It is important when you commence a contract which could be viewed as employment that you keep detailed records showing that you have considered IR35 and that it does not apply. The factors you need to consider are:
- Contract – A good self-employment contract with your client is essential as should HMRC query whether you are genuinely self-employed this is the first thing they will look at. The contract must represent the truth and reality of the engagement. A typical clause includes:
“Both parties do indeed agree and intend that the subcontractor is engaged as an independent business in his own right, under a contract for services, and not a contract of employment, or any other kind of contract.”
- Control – as an employee there is a massive amount of control over you, however if you are truly self-employed there would be minimal control over how or when you work. The subcontractor should be able to decide if they accept work, the hours they work and how he completes the task he is employed to do. A clause within the contract should state this.
- Mutuality of obligation – in a true contractor – subcontractor relationship there is no obligation to accept work from the subcontractor and no obligation to provide work by the contractor.
- Substitutes – this is an excellent example of a true contractor-subcontractor relationship, where the contractor would accept the subcontractor sending a substitute worker when the subcontractor was unavailable. A clause within the contractor to this affect is always good practice.
- Insurance – if the subcontractor is paying for public liability insurance, professional indemnity insurance and/or product liability insurance this is a good indicator of self-employed status.
- Correcting mistakes/being paid per project – being paid hourly or daily is an indicator of employment. To be truly self-employed the subcontractor would be paid per project, having to rectify any mistakes without additional payment. A clause should be included in the contract to this effect.
Other factors which can be used to determine an individual is really self-employed include:
- Subcontractor can make a loss as well as a profit
- He provides his own tools, equipment and materials
- He has his own employees
- He advertises his services
- He has own van, own logo, own working clothes
The future of IR35
Although it won’t be confirmed until the Autumn Statement on 25th November 2015 it is predicted within the industry that IR35 will cease to exist. In its place will be legislation which will put the onus on the contractor rather than the subcontractor. If HMRC judges the subcontractor as self-employed under the new legislation then the contractor will be liable for payment of Employer’s National Insurance at 13.8% on the payments made to the subcontractor.
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