Contractors working through their own company for clients either directly or indirectly may be caught by the intermediaries legislation, known in the press as IR35.
The effect of working through your own company
The IR35 legislation was written in an attempt to stop companies firing their workers on Friday and then hiring the same people the following Monday through their own company. The new arrangement results in less tax and national insurance becoming payable, not surprisingly HM Revenue & Customs were not keen.
What does IR35 do?
The IR35 legislation looks through the contracts and creates a deemed contract between the worker and the client. If this contract has the traits and characteristics of employment then HM Revenue & Customs will try to charge income tax and national insurance on the salary that would have been paid had the contract been made directly as a contract of employment.
The three key factors:
There are three key facts in determining whether any individual contract is caught by the IR35 legislation or whether the contract is outside the legislation:
1. The right of substitution
If you do not fulfil the contract yourself but rather you provide another worker to complete some of the work then you will not be caught by the IR35 legislation. Often you do not provide a substitute worker on the contract, however with the correct wording in the contract you may still be outside the IR35 rules; it is the unrestricted right to provide a substitute that is important.
2. Control over the worker
If the worker is just filling in and completes any work that comes up in a way that the client dictates whilst at the client’s offices then it looks as if the client controls the worker. If you can determine how you complete each task and meetings tend to be more of a progress report, if you work from home, or if you can control which hours you work, then this indicates that the client is more interested in the end result i.e. the finished project, than the way you do the work. With no control the contract is outside IR35.
3. Mutuality of obligation
This factor is often harder to understand and harder to prove than the other key factors. If you are an employee you are obliged to complete the work your employer wants done. If all your IT systems are down you may be asked to do another task, for example, filing. If you are not an employee you will probably be sent home when there is nothing to be done. The mutuality needs to exist within each contract and not just between contracts. This means a clause in the contract stating that your company is not obliged to accept work and the client or agency is not obliged to offer work is not good enough.
Secondary factors or in business on your own account
HM Revenue & Customs will sometimes use secondary factors such as whether you use your own tools, have any bad debt risks or have your own office as evidence to support their IR35 assessment. The courts have determined that these factors are not key and cannot determine the status of the contract on their own although they may add weight to one of the key factors.
What is my risk of an IR35 Review?
HMRC have produced a risk assessment schedule. The schedule and some examples are included in our IR35 blogs.
If you are concerned about your IR35 status why not register for an IR35 contract review, it’s one of the services Clearways Accountants offers to clients.