Categorized | ir35 rules, PAYE

The Lazy Man’s Summary of IR35

The Lazy Man’s Summary of IR35
IR35, more properly known as the Intermediaries Legislation, at its very simplest is a taxation treatment intended to ensure that two workers doing the same job pay the same amount of taxes.
I t was announced by the then Chancellor, Gordon Brown, in the 1999 budget and enacted in April 2000. It wasn’t mentioned in Brown’s budget speech, but in a press release after the event. This release was numbered IR35, hence the name.
It is a remarkably imprecise piece of legislation, but its stated intention is to prevent a worker who operates through an intermediary company, such as a micro-business or limited liability partnership, avoiding paying some NICs by taking payments in dividends rather than as salary. Dividends are essentially free of NICs, so the worker can save a significant amount of tax.
IR35 prevents this saving by deeming the worker’s salary to be 95% of their gross income and demands PAYE and NICs accordingly. The 5% is to cover the administrative cost of the company itself.
Dawn Primarola, the PMG at the time, announced that IR35 was not intended to apply to people who are in business on their own account. Sadly, IR35 does not – and probably could not – define the boundary between these workers and a jobbing contractor. Instead it tries to differentiate between a personal Contract of Service, which would be inside IR35 and a Contract for Services, which would not. To do this it falls back on long-standing tests of employment. Very briefly these are:
Direction and Control: is the worker under the Direction of their client and does the client exercise control over how they perform the work
Mutuality of Obligation: essentially does the client have to provide work and pay for work done, and is the worker required to accept work offered
Right of Substitution: can the worker send a substitute to perform the work
As case law has evolved it is now clear that these three tests hold firm. They must actually exist in practice as well as in the contract and the totality of the arrangement is taken into consideration as much as the precise contractual detail. As a result, most judgements on IR35 status are largely subjective. Accordingly there is significant uncertainty over any contract’s liability to IR35 and it is this that causes the problems.
There is an enormous body of work on IR35 and how to manage it, much of it stemming from an original analysis by Dave Smith of Accountax. However, the PCG (www.pcg.org.uk) was originally set up to combat IR35 and they remain the prime source of information. There has also been a recent analysis of Ten Years of IR35 by Contractor Calculator (www.contractorcalculator.co.uk) that provides much useful background.

IR35, more properly known as the Intermediaries Legislation, at its very simplest is a taxation treatment intended to ensure that two workers doing the same job pay the same amount of taxes.

I t was announced by the then Chancellor, Gordon Brown, in the 1999 budget and enacted in April 2000. It wasn’t mentioned in Brown’s budget speech, but in a press release after the event. This release was numbered IR35, hence the name.

It is a remarkably imprecise piece of legislation, but its stated intention is to prevent a worker who operates through an intermediary company, such as a micro-business or limited liability partnership, avoiding paying some NICs by taking payments in dividends rather than as salary. Dividends are essentially free of NICs, so the worker can save a significant amount of tax.

IR35 prevents this saving by deeming the worker’s salary to be 95% of their gross income and demands PAYE and NICs accordingly. The 5% is to cover the administrative cost of the company itself.

Dawn Primarola, the PMG at the time, announced that IR35 was not intended to apply to people who are in business on their own account. Sadly, IR35 does not – and probably could not – define the boundary between these workers and a jobbing contractor. Instead it tries to differentiate between a personal Contract of Service, which would be inside IR35 and a Contract for Services, which would not. To do this it falls back on long-standing tests of employment. Very briefly these are:

Direction and Control: is the worker under the Direction of their client and does the client exercise control over how they perform the work

Mutuality of Obligation: essentially does the client have to provide work and pay for work done, and is the worker required to accept work offered

Right of Substitution: can the worker send a substitute to perform the work

As case law has evolved it is now clear that these three tests hold firm. They must actually exist in practice as well as in the contract and the totality of the arrangement is taken into consideration as much as the precise contractual detail. As a result, most judgements on IR35 status are largely subjective. Accordingly there is significant uncertainty over any contract’s liability to IR35 and it is this that causes the problems.

There is an enormous body of work on IR35 and how to manage it, much of it stemming from an original analysis by Dave Smith of Accountax. However, the PCG was originally set up to combat IR35 and they remain the prime source of information. There has also been a recent analysis of Ten Years of IR35 by Contractor Calculator that provides much useful background.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Wooden Puzzle Cube by David Davies

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