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IR35 - Employment Status - Am I caught?

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As discussed in our IR35 overview, IR35 became law via Schedule 12 of the Finance Act 2000 – its prime aim was to ensure individuals working via limited companies would be subject to the same taxation laws as an individual performing the same task under standard PAYE conditions.

Or as the Inland Revenue state on their IR35 site:

"The purpose of the new rules is to remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions (NICs) by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker."

With IR35 enshrined in law for several years now, there is a wealth of IR35-related information on the web. There are also a number of dedicated tax firms who specialise in fighting IR35 cases on behalf of small businesses - so with the right advice, small businesses stand a good chance of contesting IR35 tax demands, judging by the number of successful IR35 ruling reversals made by specialists such as SJD Accountancy and the Professional Contractors Group.

The key to determining if you are caught by the IR35 rules - are you deemed to be "employed" (and therefore within IR35), or "self-employed" (and therefore outside the rules).

Therefore, since IR35 became law in April 2000, any person working via an intermediary, such as a limited company or partnership, was caught by new rules if they failed the IR35 employment status tests.

When determining a person's "employment status", the Revenue will look at the overall picture of the work carried out. If a person working via his own limited company works on a large project, with equipment provided for him and with no real responsibility or risk, chances are he will be the type of person targeted by the rules. In other words, the Revenue will say that he is working through his own limited company simply to avoid paying the same amount of tax as a regular employee performing the same work.

Genuine small businesses will most likely take risks, have responsibility for the work they do, provide their own equipment and work for several clients or partners.

IR35 was invented primarily to target 'Personal Service Companies' - IT contractors and other freelancers in particular, although it could apply equally to any type of small business set up as a limited company, particularly one man bands.

Here are some of the key employment status pointers the Revenue will consider when determining whether or not a person is caught by IR35.

Employment Status Pointers

• Does the person have any financial risk from working on the project in question
• Does the person use his own materials and/or equipment on the project
• Does the person work as 'part and parcel' of the client organisation
• Does the person work soley for a single client, or do they have several clients?
• Does the person have fixed hours as an 'employee' would, or do they get paid by the job
• What is the intention of the parties (i.e. between the person and the client)
• Is there a written contract, and what is its length?
• Does the client provide the person with 'employee'-type perks (sick pay, car, etc)
• Can the person hire other workers and provide a substitute to work on the project?
• Might the person be paid a bonus for good work, and lose out if the work is sub-standard?

This article has been provided as an overview of how to determine if a person is caught by the IR35 rules. In reality, the Revenue will look at the overall working conditions for a given contract or project.

Posted January 4, 2006