The Intermediaries legislation known as IR35 was introduced on 6th April 2000.
The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise –
- For tax purposes, be regarded as an employee of the client; and
- For NICs purposes, be regarded as employed in employed earner’s employment by the client.
In May 2012 HMRC set out their 12 business tests:
- Business premises (10)
- PII (2)
- Efficiency (10)
- Assistance (35)
- Advertising (2)
- Previous PAYE (minus 15)
- Business plan (1)
- Repair at own expense (4)
- Client risk (10)
- Billing (2)
- Right of substitution (2)
- Actual substitution (20)
A score less than 10 is high risk and a score more than 20 is low risk. Whilst it is only guidance, these are the tests that HMRC use and if you fail the test you may be taxed on deemed payments.
Many Freelance Contractors have some assignments within IR35 and some outside, you can ask HMRC for their opinion.
If you would like HMRC’s opinion on a particular engagement you should send your contract(s) to:
IR35 Customer Service Unit
Ground Floor North
e-mail: IR35 Unit
Tel No: 0845 303 3535 (Opening hours 8.30am to 4.30pm, Monday to Friday. Closed weekends and bank holidays) Fax No: 0845 302 3535
If your contract is within IR35 its not the end of the world, the chances are that you will still pay less tax than a direct employee, to calculate the tax you have to work through 8 stages of calculation, here is a summary:
- How much were you paid? deduct 5% for business costs
- Add any other payments/non cash benefits
- Deduct business expenses – travel, meals, accommodation
- Deduct capital allowances relevant to the work done
- Deduct pension contributions made by your company
- Deduct any NIC paid by your company on your salary and benefits
- Deduct any salary or benefits already paid and taxed
- If the answer is zero or negative then there is no deemed payment, if the answer is positive you do have a deemed payment which will be taxable
HMRC have a spreadsheet you can download which has further details.