A BRIEF INTRODUCTION
IR35 is the name given to the legislation that was introduced to stop people misusing limited companies and puts them back to the same tax position as if they were employees. Essentially the veil of incorporation is removed and consideration is given as to whether the appropriate employee of the removed Personal Service Company (PSC) is really an employee of the client company. In the past it was for the directors of the PSC to decide but since April 2017 the client (if it is a public sector organisation) has to decide and in the future this may be extended to the private sector.
IR35 is probably best explained with an example. Andrea has her own company, A Limited, which contracts with Big Plc. A Limited is contracted to deliver a project for Big Plc, which Andrea will deliver. Is Andrea a disguised employee of Big Plc or not?
There are no simple answers to this question. In the courts they will consider Mutuality of Obligation (MOO) – does the client (Big Plc) have an obligation to provide future work and does the contractor have to accept this work. HM Revenue & Customs (HMRC) has an online Check for Employment Status for Tax (CEST tool), which they now admit does not test for this critical factor.
The CEST tool does however ask about: personal service, control, financial risk and part and parcel. If you take the online CEST checker then as soon as the tool decides IR35 does not apply it will end the test. Make sure you keep a copy of these results. If you get to the last section the result will either be that IR35 applies or (unhelpfully) that it is unable to determine the status. This last result is frequently the answer CEST gives when the facts of IR35 cases that HMRC have lost are fed into it.
The tax consequences of IR35 puts the individual (in our case Andrea) in the same tax position as an employee but they do not (probably) have any employee rights and they have the expense of running a company.
HMRC have lost many cases over the IR35 status of a contractor but they have won some. The main problem is that it is not always clear whether IR35 applies. Sometimes it obviously does and frequently it obviously doesn’t. But in the middle ground , which is neither black nor white, there are many shades of grey!
The solution to the IR35 problem is to remove the temptation to save tax and national insurance. This will not happen with simplistic questions but by a radical overhaul of the tax system – but that is a whole new topic!
This blog is not a technical article that covers all aspects of IR35. This blog is part of a series for ordinary people thinking about doing an extraordinary thing: setting up their own business. Professional advice should be obtained if you think your business may fall foul of the IR35 rules. We would be happy to discuss this further with you so please get in touch.
Since this blog was written in August 2018 there have been changes to IR35 and the off-payroll. HMRC have updated their CEST tool but it still doesn’t test for MOO! And from April 2020 medium and large-sized companies have the responsibility to assess for IR35.
