Intermediaries Legislation (IR35) has been in force since April 2000 and is in place with the aim to combat tax avoidance. The goal of IR35 is to segregate self-employed or temporary workers operating through their own limited company legitimately, and those who are using a limited company for tax purposes, thus saving on National Insurance and tax payments.
If you provide a service to a client through a limited company or hire employees who provide their services through a limited company, then your work will fall under IR35.
Under IR35, you will be treated just as a general employee would. This means you will pay National Insurance and tax and consequently your take home pay will be less. Although you would be taxed as a general employee, this does not mean you would be entitled to general employee rights and benefits such as sick pay, holiday pay and pension schemes.
The legislation defines your employment status and outlines how much tax you are expected to pay.
The responsibility of IR35 will depend on whether a worker provides their service in the private or public sector.
As a contractor in the private sector, it is your responsibility to work out whether you fall inside or outside of IR35. If IR35 applies to you then you are required to pay all National Insurance and tax due. As of April 2020, HMRC plans to apply the same changes to IR35 so that the public sector rules will also apply to the private sector. As a contractor, this will shift the responsibility of determining IR35 compliance to the hirer, not the contractor. As a hiring contractor, you should begin preparing for these changes as soon as possible.
Public authorities are responsible for determining if IR35 compliance apply in the public sector. As a public authority, you will be responsible for deciding if IR35 applies to a contractor before the work starts. If the hirer, or public authority decides that IR35 applies to the contract, then payments to the contractor’s limited company will be taxed, as if they were an employee.
Further information on IR35 compliance can be found on our ‘What is IR35 compliance?’ blog post.
In order to open an investigation to determine if IR35 applies to you, HMRC will use a risk based system considering several factors. Prior to April 2015, using the HMRC business entity test, self-employed workers were able to self-assess their own risk. Depending on the results of this test, HMRC could ask you to show evidence to demonstrate that you are outside the IR35 regulation or in the low risk band. Providing HMRC are happy the information you have provided is accurate and your working arrangements do not change, they will close their enquiry and will not investigate again for the next 3 years.
The enquiry process will start with a letter from HMRC asking you to:
Naturally, if you are able to provide sufficient evidence, HMRC will close the enquiry. However, if HMRC are not satisfied with the evidence you have supplied, they will write to you again inviting you for a meeting in person so that the enquiry can move forward quicker.
Once the enquiry has finished, HRMC will issue you with an opinion on whether they feel IR35 applies to you, which you can contest if you disagree. Should HMRC disagree with your objection then they will issue you a decision, again you have the right to appeal against this. If your appeals are unsuccessful with either HMRC or the Tax Tribunal then you must pay the tax and National Insurance owed.
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