If you are new to self-employment or have been a contractor who has worked with clients, IR35 is an important aspect of your working life that must be considered carefully to ensure you meet the HMRC definition of self-employment.
IR35 is the tax and National Insurance legislation that could apply if you are working through an intermediary.
So what is an intermediary?
An intermediary can be any of the following:
- limited company (sometimes called a service company or personal service company)
If IR35 legislation applies to you, all payments made to the intermediary are treated as employment income and the intermediary must pay tax and National Insurance contributions as if you are employed directly by the client.
In other words, if you are a contractor, and IR35 applies to you, you could have underpaid on your tax and National Insurance contributions. This means that interest and penalties may be charged on any additional tax and National Insurance contributions due as a result of an HM Revenue and Customs (HMRC) enquiry into your situation.
Brolii to the rescue!!
This is where we come in. As a contractor under the Brolii umbrella, you will be placed under a full contract of employment and this means IR35 is a thing of the past. You are paid by Brolii using PAYE so we handle all of your tax and National Insurance obligations so you can just get on with what you do best.
When IR35 will apply?
The following is HMRC’s exact guidance as to whether IR35 applies.
If you’re engaged by a client through your own intermediary, the client must consider your employment status to ensure they fulfil any tax and National Insurance contributions liabilities of their own. If the contract or particular working arrangement shows that you’re effectively engaged directly by the client as an office-holder or employee, then the client will be responsible for operating PAYE for you. There may be penalties if the client doesn’t operate PAYE when appropriate. If a client contracts directly with you, the client will always be responsible for operating PAYE for you, even if payment for your services is made to your intermediary.
Services provided through an agency
If you provide services to an ‘employer’ through a third party (often an employment agency) so that, technically, you are not a direct employee of either, the agency legislation may apply. If it does, you must comply with this legislation rather than IR35. If the agency is based outside the UK the client may be liable to operate PAYE and make the appropriate deduction, returns and payments of tax and National Insurance contributions instead.
Services provided through a managed service company (MSC)
If you provide your services to end clients through an intermediary company which is controlled and run by a third party service provider, then the MSC legislation may apply. If it does, you must comply with this legislation rather than IR35.
Worker client relationship
IR35 looks at the underlying relationship between you (the worker) and the client for each contract or engagement. The facts of each engagement determine whether IR35 applies and not any label, description or job title. You need to assess what that relationship would be (your employment status) if there were no intermediary involved. You and your intermediary must assess the underlying relationship between you and your client for each of your contracts individually. You must assess them again if they change.
There’s usually a contract between your intermediary and the client, either directly or through another party, such as a staffing agency, a recruitment agency or an employment business. There can be more than one agency in the chain to supply your services to a client.
IR35 will apply if all the following statements are true:
- you personally perform services for another person or business (the client) or are under an obligation to do so
- the services are provided to the client through an intermediary such as a limited company or partnership which does not meet the definition of a MSC
- your services are supplied as either an office-holder of the client or if you had provided the services directly to the client under a contract between you and the client, your employment status would be regarded as being that of an employee or office-holder of the client
- the specific IR35 conditions of liability for your intermediary are met
You can find further information about IR35 in the Employment Status Manual. It can also help you assess your hypothetical employment status were there no personal service company or partnership involved in the arrangements.
Intermediary is a limited company: conditions of liability
You’ll need to consider IR35 if one of the following applies:
- you (or an associate, or a member of your family – which can include an unmarried partner) control, or have the ability to control, more than 5% of the ordinary share capital of the company directly or indirectly
- you (or an associate, or a member of your family – which can include an unmarried partner) have, or are entitled to acquire, rights to receive more than 5% of any dividends from the company
- if your company is a close company – and you (or an associate, or a member of your family – which can include an unmarried partner) possess, or are entitled to acquire, rights that entitle you to more than 5% of the assets that would be available for distribution if the company is wound up
- you or an associate receive, or could receive, payments or benefits directly or indirectly from the intermediary which aren’t employment income, but could reasonably be taken to represent payment for the services you provide to clients
Intermediary is a partnership: conditions of liability
You’ll need to consider IR35 if you’re a partner and one of the following applies:
- you (or your family – which can include an unmarried partner) are entitled to 60% or more of the profits of the partnership
- all or most of the partnership’s income comes from providing services to a single client, or to a single client and its associates
- the profit sharing arrangements in the partnership are designed to ensure that you receive an amount based on the payments received for your services to clients for engagements within IR35 legislation.
You’re an office-holder
IR35 legislation will apply to you if you supply your services to a client through an intermediary:
- as an office-holder of the client
- if you’d be regarded as an office-holder of the client if you provided your services under a contract directly between you and the client
The IR35 National Insurance contributions legislation has always applied to office-holders. However, before 6 April 2013, the IR35 tax legislation generally only applied to office-holders if they would also have been regarded as an employee if engaged directly by the client.
The IR35 rules don’t apply:
- simply because you’re a director of your own personal service company
- just because your job title refers to you as an ‘officer’ but you don’t actually hold an office
- when a company engages another firm to provide services (such as auditor) and there’s no requirement for your personal services
Does IR35 apply to you?
If you have found that IR35 applies to you. Get in touch with us and our expert team can provide you advice on how to proceed, Contact Us Here