What is IR35?

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What is IR35?

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Why should you read this guide?

This guide will be of use to companies that provide the services of personnel as a third party intermediary. It will provide you with answers as to whether you are doing this within the law.

Background

IR35 is the name given to the Intermediaries Legislation introduced in April 2000. This legislation was announced in the 1999 budget. The press release that was issued was numbered IR35 and has since provided the common name of the legislation. The legislation was issued to close a loop hole that allowed employers to employ someone through a third party company and thus avoid Tax and National Insurance Contributions (NIC). This relates to a person who would normally have been considered an employee of the company for PAYE and NIC purposes.

The legislation now states that if the person would normally have been considered an employee if it were not for the third party company involvement, then they are required to pay a similar amount of tax and NIC.

How does this affect you?

The legislation affects a number of different parties - the client company, the worker and the intermediary company.

Client Company: If you are contracting with an intermediary company and you are aware that they are operating within the IR35 legislation then you have no need to make provision for payment of PAYE or NIC.

Worker: As a worker under IR35 legislation you have limited involvement in the scheme. You will of course still need to be happy that your employer (the intermediary company) is meeting your PAYE and NIC obligations as detailed on your payslip.

Intermediary company: As the intermediary company most of the obligations fall to you. If you believe that you are providing services under a contract that falls within the confines of the IR35 legislation then you need to ensure that you are acting appropriately and within the law. Firstly you need to find out if you are considered to be a Managed Service Company (MSC). Basically if your employees provide services to companies that would normally employ those individuals then it is likely you will be considered an MSC. You have a duty to inform all employees that they are working under an IR35 contracted situation although this may not have a direct effect on them. You are also liable to pay PAYE and NICs for these individuals.

As with most of this legislation there is a great deal that needs to be taken into account before advising individual companies on how this will affect them. If you have not done so already you should take advice from your accountant on how this legislation may affect you.

Failure to comply

HMRC see this legislation as necessary to ensure that revenues are paid to the exchequer. Failure to pay tax due will be reviewed and penalties and interest may occur along with the collection of backdated tax. Companies that fall into the category of IR35 work are an important target for HMRC and the subject of investigation.

Summary

If you believe the services that you provide could be considered subject to Intermediary Legislation you should take advice from your accountant or direct from HMRC.

Further information

To find out more about IR35 log onto www.hmrc.gov.uk/ir35.