IR35 for Dummies

By Alex Askew

IR35 is a United Kingdom tax regulation designed to tax "disguised employment" at a rate similar to employment.   If like me you were completely new to contracting, you had probably never heard of the term IR35 before or know its meaning. In this article I will explain this to make it easily understandable for someone with little or no contracting experience.

The Aim of IR35: The main aim of the so called IR35 legislation is to prevent contractors taking advantage of the tax benefits associated with operating through their own personal company.  This means people working via limited companies would be subject to the same levels of tax as 'normal employees', with the appropriate levels of income tax & national insurance.

The Constraints of IR35: There are three main elements that determine if you fall outside or inside IR35, these are:

1) Control: Are you heavily supervised by the client or independent in the way you work? This is one of the key determinants when deciding on whether or not you fall inside or outside of the legislation. So if you are behaving as a regular employee, with a high degree of supervision e.g. client can move the contractor from job to job due to changing priorities, then there will be a right of control over what is to be done and this is a strong indicator of employment being given.  This would denote you could be caught by IR35 and seen as acting inside the legislation therefore should be taxed as an employee rather than someone operating their own Limited Company.

2) Right of substitution:  If you fall ill would you be able to bring someone else in to cover your work load? If you are providing a business service, as opposed to that of an employee, then another worker from your company should be able to take your place if you were unable to complete the job at hand for any reason. If this is not the case, it is a strong indicator of employment rather than operating a business to business service.

3) Mutuality of obligation: Is your client obliged to find you more work to complete when you have finished the original project? A personal service company (outside IR35) will do the work it has been contracted to do, completing the project with no expectation of further work. This is a key determinant, & when the client is obliged to provide more paid work and the contractor is obliged to accept and complete the work, then you could be seen to be caught by IR35.

IR35 has become a highly controversial part of employment and tax law that only an expert can interpret properly. So I would advise you to seek professional advice if you are at all unsure where you fall.

Alex Askew is a marketing assistant for Danbro Accounting Solutions.  For further details, email enquiries@danbro.co.uk.

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