IR35: The beginners guide

IR35, kettlemag,
Written by Nigel Simpkins

If you’ve recently started contracting you may have heard about a piece of very important legislation that affects those working through a Limited Company. It doesn’t affect every single contractor (depending on the route you take) so it may be quite confusing when setting everything up, you may ask, does IR35 affect me? How do I find out? What happens if I ignore it?

Brookson bring you this beginners guide to IR35 and everything it envelops. Then you’ll be able to make the right choices to set you on the right course.

What Is It?

IR35 was put in place in April 2000, and is an anti-avoidance legislation aimed at preventing disguised employment. Where a contractor who would otherwise be employed by their client through a company but works under a contractor title to gain the significant tax breaks associated with contracting. This benefits the employer as they avoid paying Class 1 NIC at 13.8% along with the worker arranging their payments between salary and dividends to minimise tax.

In simple terms, if you as a contractor acts, is treated like and do the same job as an employee then you must pay the same tax as an employee.

When Does It Affect You?

IR35 applies on a client-by-client basis, so you need to make sure you’re approaching work in the same way every time to avoid getting caught by the law. Ensure to look at each client you’re working for and consider, would you be an employee for that client without a limited company or partnership? Then you could be caught by IR35 and may make a “deemed payment” to compensate for the NI that you would have paid if you were an employee.

Employee or Contractor?

You may be thinking to yourself, how do I know whether I’m an employee or a legitimate contractor? I still don’t understand!

In a 1968 court case for an employment status dispute, it was found that to determine employment, three factors must be apparent; Control, Personal Service and Mutuality of Obligation. If any of these are absent from the role then it cannot be considered employment and the individual should be considered self-employed from that point.

Control factor would be if your employer sends you to do work for a client and you must follow their methods to the note to complete the work even when there’s a variety of methods to complete it. As a self-employed contractor, you’re able to use any method available to complete that work if it complies to the industry standard and completes the work set.

Personal service requires you to physically complete the work yourself, meaning you can’t ask a qualified friend to complete the work on your behalf. Being self-employed means you’re able to send a friend of equal qualification to complete the work on your behalf while you see to other clients. Finally, mutuality of obligation means the employer is obliged to offer you further work and you’re obliged to complete that work, without the option of rejecting it.  As a contractor, you’re not obliged to take the work and the employer isn’t obliged to offer you more after the work is complete.

We would always recommend that you speak to a specialised contractor accountant if you’re still unsure about your status, they’ll be able to help you understand the risks and can assess your IR35 status.

Get in touch with a specialist contractor today, such as Brookson, and ensure that you’re fully prepared for contracting and you don’t fall into the IR35 net.