Prior to the inception of IR35 back in 2000, workers who owned their own limited companies were able to receive payments from their clients to use as revenue, like any other small business would. The profits could then be paid as dividends, saving the worker in taxes as this would reduce their PAYE/NI payments.
In the Budget of 1999, it was announced by Gordon Brown that measures were to be introduced to combat tax avoidance by using ‘personal service companies’ and as a result; the Intermediaries Legislation, more commonly referred to as IR35, was enforced in April 2000. The term ‘IR35’ refers to the consecutively numbered HMRC (formerly Inland Revenue) Budget press release number 35 in which it was announced.
The introduction of IR35 was aimed to prevent contractors from providing services to a client where, if not for their own limited company, they would work effectively as employees. The publicised background of IR35 refers to the so-called “Friday to Monday” scenario, whereby a worker could leave a job on Friday only to return on Monday to be doing the same work for the same company, but, as a contractor via their own limited company paying a dividend as opposed to earnings which would incur less tax payments.
Since its introduction IR35 has been heavily criticised namely due to its complexity, its opinion-based nature and the many grey areas it covers. The key ‘tests’ on whether the legislation applies are based on the case of Ready Mixed Concrete Ltd (1969) – this case was conducted under the National Insurance Act 1965 where the Minister of Pensions and National Insurance determined the contractor to be an ‘employed person’ based on the three key employment tests; personal service, control, and mutuality of obligations. These tests have remained as the most considered criteria for many employment status and IR35 cases alike.
A contractor being considered ‘caught’ or ‘inside’ of the IR35 legislation would mean all income received within the period of investigation being reclassified as employment income and be subject to PAYE, NIC, interest and penalties. It is therefore advised that contractors ensure they consider their own compliance by having their written terms and conditions, and working practices checked with each new engagement and when there are any material changes to current practices.
If IR35 were not complex enough, contractors will now have the IR35 reform to consider when it comes into force in April 2020. This will remove all responsibility of determining the IR35 status from the contractor and place that responsibility onto the end client, unless the client is classed as a small company. The reform is fast approaching, and we advise all contractors to discuss the changes with their client and/or the agency to establish what action is being taken to ensure the change runs as efficiently as possible. In the meantime, it is also advised to review your IR35 status as you will still be liable for payments prior to April 2020 and it is yet unclear whether HMRC will open enquiries into contractors who have their status changed on 6th April.
This article was written by Becci Hicklin, Senior Employment Status Consultant at Qdos Contractor – leading IR35 advisory and contractor insurance specialist.