Contractor Guide to IR35
IR35 has been a controversial piece of legislation since it was first proposed in 1999 and introduced in 2000. It has bewildered both contractors and tax practitioners cross the UK in what it means and how it affects freelancers. Fundamentally, it is a tax legislation to eliminate the avoidance of tax and National Insurance Contributions (NICs). Its aim is to deter self-employed professionals from pretending to be permanent employees in a company to avoid paying the full tax owed. IR35 is designed to combat disguised employment.
Why is it so controversial?The regulation has attracted numerous opinions from industry experts largely because of its high costs of administration and the low revenues that it brings to the exchequer. The factors in determining whether a contractor is inside IR35 is grey and difficult to prove and as a result there are mixed views on the legislation. What is more, there is no straightforward single test to determine the precise status of a contractor because there are no specific rules in statue.
Where can you seek help?There are numerous avenues in which you can seek guidance on IR35. It is important that you establish your status of whether you are in or outside the legislation to avoid any penalties. You can do this by speaking to an accountancy firm and liaising with the experienced and knowledgeable accounts; or alternatively there are various calculators that have been developed online. Otherwise, HM Revenue & Customs have published some risk scenarios to try and make the status transparent. They aim to reduce room for interpretation and clarify the regulation.
How is the Agency Workers Regulation related?
The Agency Workers Regulations (AWR) came into force in October 2011 and it affects contractors that are caught by IR35 and their clients. The rules state that temporary workers, who work in the same job for the same company for 12 consecutive weeks, should be given the same access to facilities and basic rights as permanent employees.
IR35 provides an incentive for businesses that make use of contractors to ensure that the engagements are not caught by the legislation. Freelancers who are seen to be ‘in business on their own account and generally outside the scope of IR35 will not be affected by the AWR rules and the engager will not be legally obliged to provide these additional rights.
What kind of factors are taken into account when determining an IR35 status?
- Length of employment
- Basis of payment
- Financial risk
- Provision of equipment
- Right of substitution
- Control and direction
This information is correct to the best of our knowledge. Laws and regulations change frequently and may be out of date. For up-to-date infomation please contact a contractor accountant.