To be honest it’s not terribly easy to find clear and concise information about the Rules of IR35. This is what HMRC has to say about them: https://www.gov.uk/guidance/ir35-find-out-if-it-applies
There is no denying this is a rather technical reading. It starts off by mentioning that IR35 applies to you when you provide a service to a client via an intermediary. So what does that mean? Well in the case of a Limited company Contractor the intermediary would be your Limited company.
It then goes on to mention that the intermediary should not be a Managed Service Company (MSC). So what’s a managed service company? Essentially, an MSC is a Limited company that the contractor doesn’t really manage themselves, a third party manages the majority of the company’s affairs rather than the contractor taking responsibility for them such as invoicing, banking along with day to day management of the company. MSC’s used to be exempt from IR35 until HM Revenue and Customs closed the loop-hole.
The guide continues by discussing “you must receive or have rights entitling you to receive a payment or benefit that is not employment income”. In other words, you must get paid for your contract and your income must not be similar to that of employment income. A prime example of this being; when your client does not issue you a monthly payslip with national insurance or income tax deductions and you do not have a salary i.e. you are a contractor and NOT a disguised employee.
This article also highlights that you as the worker of your Limited company also need to meet certain conditions. IR35 legislation states that hypothetical contract between the worker and client must be created, which looks at your contract and the arrangements the worker has with the client. In more detail, some of the things your hypothetical contract will look at are:
- Control – are you managed by the client? Or do you have the freedom to work under your own control?
- Financial risk –if a client fails to pay you, you would experience financial loss.
- Substitution – can someone other than you perform the task your company has been contracted to do if you are unable to perform the contract?
- Provision of equipment – could you use your own laptop? Sometimes for security measures, you won’t be able to use your own laptop but allowances are made for these situations.
- The right of dismissal – can the client immediately terminate your contract?
- Employee benefits – you can forget about receiving any holiday pay, sick pay, pension contributions, training courses, Christmas dinners or the annual staff summer outing.
These factors will check that your working practices aren’t too similar to a permanent employee, for a more in-depth list of what HMRC consider to be an employee please visit: https://www.gov.uk/government/collections/employed-or-self-employed
If your hypothetical contract proves that you are providing a service to your client and does not suggest any of the working practices are similar to that of an employee, then your contract should fall outside of IR35.
These rules are actually very simple, if you look like an employee, are controlled in a similar way to an employee, receive employment rights and don’t appear to be taking or accepting the responsibility of running your own Limited company you’ll probably be inside IR35. A good way to imagine is the relationship you have with a builder, they agree on a price, carry out the work, you don’t provide any employment rights, if the builder can’t make it they will send in another builder to complete the work and if you don’t pay they incur a financial loss. All this points to the builder running their own legitimate business and nobody would think for a minute that they were an employee of yours.
IR35 is complicated and it is advisable to speak to an IR35 specialist about reviewing your contract. SJD Accountancy can offer both verbal and written contract reviews. For more information request a call back below or visit our contact page.