The intermediary legislation, otherwise known as IR35, has been introduced by HMRC to stop tax avoidance through disguised employment. Basically, the new regulation aims at employees who disguise themselves as personal service companies to take advantage of contractors’ tax benefits. Otherwise, when working through an employment intermediary, tax relief claims for commuting & subsistence are restricted.
Verifying if the IR35 legislation applies to contractors is quite complicated. How will contractors’ status be determined? How will they get paid? This legislation reflects a contract-by-contract basis.
Therefore, the question is: “Does the contract assignment fall inside or outside of Supervision, Direction or Control?”
How is SDC defined?
Supervision-managing a worker & ensuring specific work is done
Direction-directing a worker to carry out a job through instructions
Control-dictating what a worker should do and how to do it
Regardless if they fall under IR35 or not, all contract assignments should include the following details:
- duration of job (starting and due dates)
- specific working days
- length of lunch time breaks
- direct clauses showing that the client controls & supervises the contractors
There are two types of contracts. One is a contract of service, where the IR35 legislation applies, and the other is a contract for service, where the IR35 legislation does not apply.
The contract of service is an employment engagement referring to individuals who:
- have an obligation to personally perform services to businesses or people directly, through an intermediary (a limited company) or others
- are supervised, directed and controlled
The contract for service is NOT an employment engagement. This contract applies to self-employed individuals or consultants who:
- control when, where and how services are provided
- can terminate engagements through a notice, giving a specified time period
- supply their own equipment needed for providing services
- receive a fixed fee for completing a delegated assignment & are responsible for the process
- can appoint substitutes to deliver services
- are financially liable & at risk if specified services are not delivered in line with contracts
Identifying the IR35 employment status
How can you tell the difference between a disguised employee and a genuine contractor?
Besides the day-to-day management of business and the contractual wording, there are three main tests of employment to evaluate independent contractors’ working practices. If you fail even one of the three tests below AND use a limited company to trade, you’d be considered a “disguised employee”. Disguised employees are also known as “the Friday-to-Monday mob”, “tail-end charlies” or “permtractors” because they behave like regular employees but trade behind a limited company.
In this case, contractors are considered “INSIDE IR35”, and can not claim expenses. When someone passes all three tests, they are “OUTSIDE IR35” and can claim expenses at the end of the financial year.
Control: controlling the overall working process until the job is completed and delivered.
Can you substitute a worker assigned to a job?
Do you decide how to split your time at work?
Personal Service: completing the work you’ve been contracted to do.
Can you assign work to people?
Are you using your own equipment?
Do you risk your own money when buying resources, running costs or incurring overheads?
Mutuality of Obligation: obligations between client and contractor split in two parts:
- obligations within current contract agreement
Can you leave whenever you like?
- obligations after contract agreement
Once the work you were originally hired to do is completed, does the client feel obligated to give you more work? If so, must you accept it?
Contracts need to be reviewed in order for contractors to be assured that services are outside IR35. Otherwise, heavy penalties will apply for non-compliance due to falsified employment status. If HMRC uncovers false operation outside IR35, contractors will have to pay previous underpaid tax, a penalty equal to that tax and interest for the duration the additional amount was held. HMRC can perform a 5-year investigation and thoroughly review accounts for that time period. Tax tribunals are extremely stressful and costly, when it comes down to time and money. So, professionals must assess their SDC status to prove that they work as independent contractors if they want to work outside the intermediary legislation and claim expenses.
To sum up, limited company contractors occupying more than one contractor or use subcontractors are considered intermediaries. Keeping this in mind, full details of every worker and subcontractor will have to be reported to HMRC, every 3 months for a year, even if it was one day’s work. There are harsh penalties for not reporting and records must be maintained for three years.
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