Initially implemented in April 2000, IR35 aims to distinguish between those genuinely in business for themselves (self-employed) and those deemed as ‘disguised’ employees through the combination of a series of factors and tests.
IR35 is a piece of UK tax legislation implemented by HMRC. It was designed to prevent workers from leaving a position only to return days later as a limited company and do the same job as before, but pay corporation and dividend tax rather than income tax.
By working through the intermediary of a limited company, referred to as a Personal Service Company (PSC) by HMRC, contractors are liable to corporation and dividend tax, but by paying themselves a low salary they can stay below the threshold for Employees National Insurance. On the other side of the fence, the organisations offering the contracts do not have to pay Employers National Insurance for the services of these companies. A significant factor in establishing the popularity of contracting before the implementation of IR35.
Though many contractors are genuinely in business for themselves, the system was abused by some individuals and organisations. As previously mentioned, IR35 allows HMRC to examine the relationship between contractors and their employers. This examination is more than just ticking off items on a checklist, rather more painting a full picture of each unique situation. That being said three key tests lie at the heart of IR35.
- Personal Service – Is the service personal or is it a genuine business offer?
- Control of Work – To what extent do employers control the services being carried out by the contractor.
- Mutuality of Obligation – Is there an obligation for the employer to provide consistent paid work? Is the contractor obliged to accept the work offered?
Should HMRC determine that, if not for the existence of a PSC, the relationship is that of employer and employee then the contract is deemed to be inside IR35. If contact between the two and the established working practices show that this is not the case, then the contract is deemed to be outside IR35.
Historically the responsibility of determining the IR35 status of a contract has rested in the hands of the contractors. It was up to them to determine if they would be outside of IR35, and as such be able take advantage of the tax savings, or if they would fall inside of IR35. This changed in 2017 after a reform of the regulation and the introduction of the Off-Payroll rules for the public sector. The key focus of the reform was to shift responsibility for determining IR35 statuses onto public sector employers.