What is IR35?
IR35 is a piece of legislation enacted when Gordon Brown was Chancellor. IR35 came into force in April 2000, and was designed to ensure that what had become known as 'disguised employment' was taxed in an equitable way when compared to the taxation of regular employment. It particularly targets those individuals who own their own companies and had previously paid themselves from company revenue in a way that would avoid or mitigate a National Insurance liability.
BackgroundIR35 was a direct response to the practice of using intermediary organisations to channel payments from clients to workers. Frequently, workers had previously used an intermediary from whom they would receive payment, rather than taking payment directly from the client. This technique was most frequently used by individuals who owned their own company, and had significant tax benefits for the worker; rather than entering into a contract of employment with the client, they could pay themselves via dividends from the company, thus avoiding the payment of National Insurance contributions.
The term IR35 refers to the contentious press release in which the legislation was announced, as part of the 1999 Budget. The IR35 solution gave the Inland Revenue the power to draw up a 'hypothetical contract' that, when HMRC deemed it suitable, would show that the individual in question was taking on 'disguised employment'. Any money earned in this way would then be taxed as if they were an employee of the client. Clearly, therefore, the provisions of the IR35 solution apply only to those who would have a contract of employment with the client, were it not for the presence of the intermediary company.
IR35 was controversial from the beginning. Many effectively self-employed individuals who had, for whatever reason, been driven to incorporate a limited company, already resented the fact that they were actually paying more than 20% in National Insurance Contributions as they were required to pay both employers' and employees' contributions. IR35 made circumvention of this virtually impossible. Furthermore, small businesses frequently incorporate for reasons other than tax evasion. However, IR35 has made the affairs of these companies significantly more difficult, particularly in cases in which the company takes on many short-term contracts.
IR35 AdviceAs a response to the legislation, some organisations started to offer IR35 advice to affected individuals. The Professional Contractors Group is the largest of these, and has offered IR35 advice for some years. It claims that it has won 1,426 of the 1,428 appeals that it has made against individual cases relating to IR35. One of the most significant problems associated with IR35 is that it is unclear whether individual contracts are affected; the Inland Revenue will only make a judgement after contracts have been signed.
As a result, it is often necessary for individuals to enter into contractual agreements without being aware of the real tax implications. It is possible, however, to use an IR35 calculator to determine the extent of any IR35 liability that you might suffer. The Professional Contractors Group offers a free IR35 calculator that works out how much tax would be payable if IR35 applied to a contract, and gives details of how much the contractor's rate would have to be increased to offset this extra cost.
IR35 is a very complex area of taxation. If you are concerned that you might be affected by its provisions, you should seek advice from a reputable accountant as soon as possible.