What is IR35?

IR35 is tax legislation introduced in the 2000/2001 tax year. Its purpose is to ensure those individuals who work through a limited company and who therefore treat a portion of their income as salary and a portion as dividends, are entitled to do so. This largely hinges on the basic question "are you self-employed or employed?"

Unfortunately, there are no hard and fast rules on this and it is initially the tax inspector and ultimately the courts, to consider each case that comes before them. As the legislation is still new, there are relatively few court rulings to help us, so the best you can do is to take reasonable precautions to consider whether the legislation could affect you.

If the Inland Revenue decides you should be regarded as "employed", then you would potentially be liable for the tax that should have been paid, had all your income been treated as subject to PAYE and NIC. This is largely the PAYE and NIC you have saved by working through a limited company, subject to certain allowances. You could also be charged interest on the amount you have been found to have underpaid and possibly penalties as well, if the inspector feels you are at fault.

How do I decide if I’m self-employed for the purposes of IR35?

Unfortunately, this is far from simple, as there are so many possible interpretations that can be put on how you work, as each assignment can differ. However, there are some pointers that help. Please consider the following sections carefully.

Section 1
If you answer ‘yes’ to any of the following questions, you are most likely NOT operating as a self-employed person for the purposes of IR35 and would not fall outside of IR35, and thus, would normally not be allowed to work through an umbrella company.

1. The ‘client’ means the business you are providing your services to.
2. Does your contract state you are an employee of the client?
3. Is it intended you should become an employee of the client?
4. Are you likely to be providing your services to the same business and in the same location for over 6 months?
5. Does the business usually request you personally to provide the services?
6. Are you a member of the client’s pension scheme?
7. Does the client pay you sick pay if you are off work?
8. Does the client pay you holiday pay?
9. Are your terms and conditions the same as the permanent employees of the client?
10. Does the client give you a company car or van?
11. Have you the authority to hire and fire the client's staff?
12. Does the client have an obligation to offer you regular work?
13. Do you have to accept work from the client if you're offered it?
14. Are you eligible for redundancy notice or redundancy payments from the client?
15. Do you use the client's letter headings and business cards, and claim expenses on the client's claim form?

Section 2
It will help your case for self-employment for IR35 purposes if you can answer ‘yes’ to the following questions:

1. Could you (or the agency) find a substitute to undertake your work if you cannot undertake the work yourself?
2. Having been allocated your assignment, are you given reasonable freedom as to how to complete it?
3. Do you take any financial risk and use your own equipment on each assignment?
4. Is your contract for as long as your services are needed, rather than for a fixed term?
5. Do you regard yourself as being independent from the client and do permanent employees of the client regard you as independent from the client?

For more information, please read the Inland Revenue IR56 booklet.