IR35 is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.
Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC). If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 is significant. It can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.
What are the IR35 tests?
We have provided below the three main IR35 tests to determine if you are a “disguised employee” and therefore within IR35. It is important to remember when reading our tips on passing the tests below, that you need to not only have a well written and professionally reviewed contract but also consider your actual work practices.
|Test||What Is It?||How To Pass It?|
|Personal service and substitution||A truly independent contractor would be providing a service to his client, and therefore should not matter if he does the work himself or uses a substitute.|
Whereas an employee must do the work himself and could never use a substitute.
|You should have a “substitution” clause written into your contract showing that you can use subcontractors to complete the service for the client.
If you can substitute yourself with a suitably qualified person to provide the service, you are not an employee.
|Mutuality of obligation||An independent contractor would not expect to always have a continuous supply of work, but would rather be contracted to supply services towards a specific project or set of tasks.|
Whereas an employee is expected to turn up for work regardless if the work has run out.
|You should have a “termination” clause in your contract allowing you to you end the contract early if required.
If you can end the contract quickly and easy and there is no expectation of the client offering you a continuous supply of work and contracts, you are not an employee.
|Direction & Control||An independent contract would have a degree of freedom over how they carry out their work and their working practices.|
Whereas an employee is obliged to normally work from a specified place and carry out tasks to specific instruction.
|Your contract should be clear that you are in control of your locations and hours of work. If you client is heavily involved in your day to day activates, this is deemed as employment and you would fail the test.
In our experience you should be using your expert skills to develop and propose solutions to client issues and problems.
Note, this does not mean that a client cannot monitor and check your work – you simply must not be tied down to the client.