IR35 explained

Introduction

IR35 is the Inland Revenue’s latest crack down on income tax avoidance, and has been designed to plug a £900 million loophole in current tax law. It is aimed solely at employees who, by using a personal service company (PSC) to mask their true nature of employment, can limit their income tax and National Insurance payments and so avoid large sums of tax.

It was first mentioned by the Chancellor in his budget speech in 1999 and after much revision was issued as a consultation document in September 1999 which was adopted as a working draft in February 2000 and finally enabled as a statutory instrument on 6th April 2000. It has been law since then.

IR35 is not solely directed at service providers within the IT market. It covers doctors, workers in the film and TV industry, engineers, cleaners and just about anyone who provides services through their PSC.

How does it work?

IR35 is aimed at the individuals and not the PSCs themselves, and will be policed through the existing self-assessment regime. To determine if tax is being avoided, the Inland Revenue will apply the current case law-based employment/self employment tests on the individual and then raise an assessment on that individual if it determines that the PSC is a mask purely to avoid tax. As well as the tax, the Inland Revenue determines has been avoided, penalties will also be applied which can be up to 100% of the tax avoided.

Through self-assessment, the Inland Revenue will review an individual’s personal circumstances and determine if, by using a PSC that individual is masking his or her true employment nature. In determining this the Inland Revenue will ignore the relationship between the individual, his or her PSC and the agent and look straight at the relationship with the end client. It will determine whether this arrangement is really one of employment or not. To determine this it will apply the most current case law, look at the contract terms between the individual’s PSC and the client (through the agent) and the general circumstances of the individual. The Revenue will weigh up all the information available in order to make a decision.

What does this mean to me?

Case law is well established in the area of conflict between employment/self-employment and is generally and widely understood. Through the application of case law a good agreement for the provision of services between a PSC, its agent and client can be adopted to include some of the more important determinates:

  • a right of substitution of personnel under the contract
  • a right to seek other income streams during the currency of the agreement
  • provision of the equipment required to provide the service
  • a right to provide the agreed service at times and locations to suit the provider
  • being treated differently from a Clients employees

It is important however that any agreement truly reflects the nature of the services provided and the circumstances under which they are provided.

One of the prime determinates in case law has been the concept that a self-employed individual suffers financial risk and may profit from good commercial decision making. As well as reflecting a degree of financial risk in the agreement the individual must demonstrate this generally. This can be in the form of taking fixed price work, investing in training and equipment, employing other staff, enjoying income streams from other sources, having an office at home, marketing your services etc.

It is important, therefore, to ensure that in any contract for service a strongly worded agreement is in place that fully mirrors the true nature of the service provided to the end client. It is also important that, as an independent contractor, you do run your venture on a commercial basis and can demonstrate this commerciality and risk.

At Chase Zander, we haven’t simply redrafted our contract terms – like many agents who seem to think this solves the problem. We have spent much of the last 6 months speaking with our clients, briefing them on IR35 and making them aware of some of the changes that need to be made in order to retain and benefit from the best contractors. We firmly believe that the contract is not the total solution to IR35.

With Chase Zander’s help, our clients’ standard agreements for the provision of contract staff have been modified, as have their working practices. We can also advise you on what is needed to be more commercial and how to limit your financial risk. We can of course also help you find alternative income streams. All our consultants have been briefed on the legal and financial ramifications of IR35 and they would be more than happy to hear from you. You can contact them today on 0870-997 9000 or via the contact us page.

If you have found this article valuable then you may be interested to read some of our other job seeker help guides including some great video guides starring members of the Chase Zander team!