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IR35, to put it simply, is a legislation to prevent forming and using of a LTD. Company by employees (based on contract distinction) for tax favorability purposes.
In England, as in all countries with no exception, everyone tries to pay as little tax as possible but at the same time, to remain within the legal boundaries. For this purpose, many employees have established companies and began working through them in order to have more favorable treatment on their personal tax affairs. However, HMRC considered this as “disguised employment” and brought the IR35 legislation, also known as “the intermediaries legislation.
THE SYSTEM IN PRACTICE
- Before IR35
Before the implantation of the law, the service provider received payment directly in the name of the company and managed its capitals in the best possible way so as to avoid paying more tax and NIs (National Insurance Contributions), for example, through dividend, wage grid limit or other management mechanism.
- After IR35
If the rules, under which the service is provided, fall into the IR35 context, the service provider is still paid through the company, but is considered an employee and the deductions (taxes, insurance contributions etc.) are taken beforehand and on the total amount, exactly as it would happen if there was no company. Therefore, capital management for tax purposes is not possible.
In other words, the government tries to differentiate those providing services as employees (but wishing to be treated as business owners) from those actually owning a business.
DIFFERENCE BETWEEN EMPLOYEE AND BUSINESS OWNER
If you work in the public sector, differentiating between the two categories is the responsibility of the organisation you work for.
If you are in the private sector, however, it is your responsibility to notify the HMRC and make sure you are within IR35 rules. The process of distinction can vary from very simple to very complicated, due to complications not only of the law itself, but also of the not so clear fundamental (contractual) service relation status. The main points that are assessed are:
BACKGROUND - Check of the advertisement task- for example, if required to cover a former employee, instead of a project.
PREVIOUS SERVICE PROVIDER RELATION - If the new service provider relation is the same as the previous, which was within IR35 rules.
CONTRACTUAL RELATION WITH THE SERVICE PROVIDER - If the contract has been devised by professionals of the field and not with self-made rules and clauses, which clearly aim to avoid IR35.
INDEPENDENCE - The degree of the service provider’s independence as defined in the contract: A) start and finish time of provided service B) if the working days are specified C) if break time noted and/or clarified D) if there are clauses that determine that the customer supervises the service provider.
SUBSTITUTION - If the service provider can send someone else in His/Her place.
MUTUALITY OF OBLIGATION - If the employer is obliged to offer work and the worker is obliged to accept it under specified contract agreement.
REMUNERATION - If the service provider is getting paid consistently on a periodic basis or based on invoices, where details of the services provided and relevant charges are clearly noted.
PART AND PARCEL - If the service provider appears to be an integral part of the client’s business-company for example, through the investigation of telephone calls, correspondence, or if the service provider has the client’s employees under his/her supervision.
ADMITTING PARTIES - Τhe clarified relation between the parties as defined in the contract, for example “Employer” and “Employee” or “Client” and “Concessionaire”.
The conclusion as to whether IR35 rules apply or not is drawn based mainly (but not inly) on the above criteria.
If you believe that IR35 may apply to you, it is critical that you contact a specialist to make sure your practice is legal and avoid any no-compliance fines. Important to remember - The outcome is not solely based on how the condition of employment works in practice, but also on what is written in the contract signed by the parties.
You can click HERE to check your employment condition online on the HMRC website. For more details and information, please log on to GOV.UK.
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Translated / Edited by: Apostolia Nestoratou
© 2018 UPECO LTD
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ATTENTION!
This article intends to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.